Customer Concentration and Stock Price Crash Risk

Customer concentration of targets in mergers and acquisitions

“…While several papers suggest that firms with a concentrated customerbase can have higher profits because of improved efficiencies (Kalwani and Narayandas, 1995;Patatoukas 2012), our findings suggest that the risk considerations manifest prominently in the M&A market. Our paper relates to prior studies that document that customer concentration is associated with higher cost of equity, cost of debt and crash risk (Dhaliwal, Judd, Serfling, and Shaikh;Campello and Gao 2017;Chen, Hu, Meng, and Yao 2018). Our findings quantify the economic consequences of customer concentration in M&A markets and may be of interest to practitioners who seek to understand how attributes of their customer bases impact their firms' prospects in M&A markets.…”

Customer Concentration of Targets in Mergers and Acquisitions

“…While several papers suggest that firms with a concentrated customerbase can have higher profits because of improved efficiencies (Kalwani and Narayandas, 1995; Patatoukas 2012), our findings suggest that the risk considerations manifest prominently in the M&A market. Our paper relates to prior studies that document that customer concentration is associated with higher cost of equity, cost of debt and crash risk (Dhaliwal, Judd, Serfling, and Shaikh;Campello and Gao 2017;Chen, Hu, Meng, and Yao 2018). Our findings quantify the economic consequences of customer concentration in M&A markets and may be of interest to practitioners who seek to understand how attributes of their customer bases impact their firms' prospects in M&A markets.…”

Governments as customers: Exploring the effects of government customers on supplier firms’ information quality

“…The closest paper to ours is Y. Chen et al. (2019), which finds that corporate customers incentivize firms to withhold bad news; using firms with major government customers, we find the opposite.…”

“…Given the importance of customers, accounting literature shows how major customers affect supplier firms’ incentives to engage in earnings management (Raman & Shahrur, 2008) and tax avoidance (Cen et al., 2017). Other studies examine the effect of major customers on supplier firms’ cost of financing (Campello & Gao, 2017; Dhaliwal et al., 2016), accounting conservatism (Hui et al., 2012), managerial hoarding of bad news (Y. Chen et al., 2019), and audit pricing and quality (Krishnan et al., 2019). While prior research focuses on major corporate customers, little is known about the US government's role as a major customer and how it affects upstream firms’ information environment and quality.…”

“…First, governments as customers are less subject to profit‐maximizing incentives; thus, they could have different incentives and capabilities relative to corporate customers to monitor suppliers (e.g., Banerjee et al., 2014; Hui et al., 2012). Second, government customers face little risk of default or declaring bankruptcy; therefore, the government customer–supplier relationship is more durable than normal relationships, resulting in fewer incentives for supplier firms to engage in opportunistic behavior (e.g., Y. Chen et al., 2019; Raman & Shahrur, 2008). Third, government procurement contracts have greater transparency, making it easier for outsiders to be aware of proprietary information in a customer–supplier relationship.…”