Customer concentration risk and the cost of equity capital

Dan S Dhaliwal, J. Scott Judd, Matthew Serfling, Sarah Shaikh

Research output: Contribution to journalArticle

50 Citations (Scopus)

Abstract

This study investigates the relation between customer concentration and a supplier's cost of equity capital. We hypothesize that a more concentrated customer base increases a supplier's risk, which results in a higher cost of equity. Our results show a positive association between customer concentration and a supplier's cost of equity, and this relation is more pronounced for suppliers that are more likely to lose major customers or that are more prone to larger losses if they lose such customers. Further, results from a propensity score matched sample analysis and instrumental variables regressions imply that our findings are robust to accounting for endogeneity. We also provide evidence that a supplier with a concentrated base of safer government customers has a lower cost of equity. Finally, we document a positive relation between corporate customer concentration and a supplier's cost of debt. Overall, our findings suggest that the composition and concentration of a supplier's customer base significantly impact its financing costs.

Original languageEnglish (US)
Pages (from-to)23-48
Number of pages26
JournalJournal of Accounting and Economics
Volume61
Issue number1
DOIs
StatePublished - Feb 1 2016

Fingerprint

Cost of equity capital
Suppliers
Cost of equity
Instrumental variables regression
Government
Customer relations
Costs
Endogeneity
Cost of debt
Propensity score
Financing

Keywords

  • Business risk
  • Cost of debt
  • Cost of equity
  • Customer concentration

ASJC Scopus subject areas

  • Accounting
  • Economics and Econometrics
  • Finance

Cite this

Customer concentration risk and the cost of equity capital. / Dhaliwal, Dan S; Judd, J. Scott; Serfling, Matthew; Shaikh, Sarah.

In: Journal of Accounting and Economics, Vol. 61, No. 1, 01.02.2016, p. 23-48.

Research output: Contribution to journalArticle

Dhaliwal, Dan S ; Judd, J. Scott ; Serfling, Matthew ; Shaikh, Sarah. / Customer concentration risk and the cost of equity capital. In: Journal of Accounting and Economics. 2016 ; Vol. 61, No. 1. pp. 23-48.
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