IDEAS home Printed from https://ideas.repec.org/a/bla/acctfi/v63y2023i2p2035-2079.html
   My bibliography  Save this article

Customer concentration, leverage adjustments, and firm value

Author

Listed:
  • Obaid Ur Rehman
  • Xiaoxing Liu
  • Kai Wu
  • Junfeng Li

Abstract

We examine the relationship between customer concentration and capital structure adjustment speed using a sample of US listed firms from 1977 to 2020. We found that the customer‐concentrated firms have a lower speed of leverage adjustment. Customer concentration affects leverage adjustment speed mainly through increased cash flow volatility and asset specificity. The negative association is more pronounced in firms with high relationship‐specific investments and low switching costs for their customers. Stock market reacts to leverage deviation strongly for firms with concentrated customers. Our findings highlight the vital role of customers as key stakeholders in capital structure decisions.

Suggested Citation

  • Obaid Ur Rehman & Xiaoxing Liu & Kai Wu & Junfeng Li, 2023. "Customer concentration, leverage adjustments, and firm value," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(2), pages 2035-2079, June.
    • Handle: RePEc:bla:acctfi:v:63:y:2023:i:2:p:2035-2079
    DOI: 10.1111/acfi.12947
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/acfi.12947
    Download Restriction: no
    File URL: https://libkey.io/10.1111/acfi.12947?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Hui, Kai Wai & Klasa, Sandy & Yeung, P. Eric, 2012. "Corporate suppliers and customers and accounting conservatism," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 115-135.
    2. Inderst, Roman & Wey, Christian, 2007. "Buyer power and supplier incentives," European Economic Review, Elsevier, vol. 51(3), pages 647-667, April.
    3. Oliveira, Mauro & Kadapakkam, Palani-Rajan & Beyhaghi, Mehdi, 2017. "Effects of customer financial distress on supplier capital structure," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 131-149.
    4. Cook, Douglas O. & Tang, Tian, 2010. "Macroeconomic conditions and capital structure adjustment speed," Journal of Corporate Finance, Elsevier, vol. 16(1), pages 73-87, February.
    5. Mai, Yong & Meng, Lei & Ye, Zhiqiang, 2017. "Regional variation in the capital structure adjustment speed of listed firms: Evidence from China," Economic Modelling, Elsevier, vol. 64(C), pages 288-294.
    6. C. Edward Fee & Charles J. Hadlock & Shawn Thomas, 2006. "Corporate Equity Ownership and the Governance of Product Market Relationships," Journal of Finance, American Finance Association, vol. 61(3), pages 1217-1251, June.
    7. Huang, Rongbing & Ritter, Jay R., 2009. "Testing Theories of Capital Structure and Estimating the Speed of Adjustment," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(2), pages 237-271, April.
    8. Huang, Henry He & Lobo, Gerald J. & Wang, Chong & Xie, Hong, 2016. "Customer concentration and corporate tax avoidance," Journal of Banking & Finance, Elsevier, vol. 72(C), pages 184-200.
    9. Acharya, Viral V. & Bharath, Sreedhar T. & Srinivasan, Anand, 2007. "Does industry-wide distress affect defaulted firms? Evidence from creditor recoveries," Journal of Financial Economics, Elsevier, vol. 85(3), pages 787-821, September.
    10. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    11. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    12. Zhiqi Chen & Xiaoqiao Wang, 2020. "Specific investment, supplier vulnerability and profit risks," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(9-10), pages 1215-1237, October.
    13. Ivo Welch, 2004. "Capital Structure and Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 106-131, February.
    14. Leonid Kogan & Dimitris Papanikolaou & Amit Seru & Noah Stoffman, 2017. "Technological Innovation, Resource Allocation, and Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(2), pages 665-712.
    15. Nguyen, Thao & Bai, Min & Hou, Greg & Vu, Manh-Chien, 2020. "State ownership and adjustment speed toward target leverage: Evidence from a transitional economy," Research in International Business and Finance, Elsevier, vol. 53(C).
    16. Williamson, Oliver E, 1983. "Credible Commitments: Using Hostages to Support Exchange," American Economic Review, American Economic Association, vol. 73(4), pages 519-540, September.
    17. Christopher M. Snyder, 1996. "A Dynamic Theory of Countervailing Power," RAND Journal of Economics, The RAND Corporation, vol. 27(4), pages 747-769, Winter.
    18. Frank, Murray Z. & Goyal, Vidhan K., 2004. "The effect of market conditions on capital structure adjustment," Finance Research Letters, Elsevier, vol. 1(1), pages 47-55, March.
    19. Wolfgang Drobetz & Gabrielle Wanzenried, 2006. "What determines the speed of adjustment to the target capital structure?," Applied Financial Economics, Taylor & Francis Journals, vol. 16(13), pages 941-958.
    20. Halling, Michael & Yu, Jin & Zechner, Josef, 2016. "Leverage dynamics over the business cycle," Journal of Financial Economics, Elsevier, vol. 122(1), pages 21-41.
    21. Kale, Jayant R. & Shahrur, Husayn, 2007. "Corporate capital structure and the characteristics of suppliers and customers," Journal of Financial Economics, Elsevier, vol. 83(2), pages 321-365, February.
    22. Swee-Sum Lam & Weina Zhang & Reginald Reagan Chua Lee, 2013. "The Norm Theory of Capital Structure: International Evidence," International Review of Finance, International Review of Finance Ltd., vol. 13(1), pages 111-135, March.
    23. Yin, Qie Ellie & Ritter, Jay R., 2020. "The Speed of Adjustment to the Target Market Value Leverage Is Slower Than You Think," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 55(6), pages 1946-1977, September.
    24. Hovakimian, Armen, 2006. "Are Observed Capital Structures Determined by Equity Market Timing?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 41(1), pages 221-243, March.
    25. Michael L. Lemmon & Michael R. Roberts & Jaime F. Zender, 2008. "Back to the Beginning: Persistence and the Cross‐Section of Corporate Capital Structure," Journal of Finance, American Finance Association, vol. 63(4), pages 1575-1608, August.
    26. D’Acunto, Francesco & Liu, Ryan & Pflueger, Carolin & Weber, Michael, 2018. "Flexible prices and leverage," Journal of Financial Economics, Elsevier, vol. 129(1), pages 46-68.
    27. Yossef Spiegel & Daniel F. Spulber, 1997. "Capital Structure with Countervailing Incentives," RAND Journal of Economics, The RAND Corporation, vol. 28(1), pages 1-24, Spring.
    28. Maksimovic, Vojislav & Titman, Sheridan, 1991. "Financial Policy and Reputation for Product Quality," The Review of Financial Studies, Society for Financial Studies, vol. 4(1), pages 175-200.
    29. Cai, Kelly & Zhu, Hui, 2020. "Customer-Supplier relationships and the cost of debt," Journal of Banking & Finance, Elsevier, vol. 110(C).
    30. Jianbo Song & Xin Wang, 2019. "Customer concentration and management earnings forecast," Economic and Political Studies, Taylor & Francis Journals, vol. 7(4), pages 454-479, October.
    31. Itzkowitz, Jennifer, 2013. "Customers and cash: How relationships affect suppliers' cash holdings," Journal of Corporate Finance, Elsevier, vol. 19(C), pages 159-180.
    32. Antoniou, Antonios & Guney, Yilmaz & Paudyal, Krishna, 2008. "The Determinants of Capital Structure: Capital Market-Oriented versus Bank-Oriented Institutions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(1), pages 59-92, March.
    33. Campello, Murillo & Gao, Janet, 2017. "Customer concentration and loan contract terms," Journal of Financial Economics, Elsevier, vol. 123(1), pages 108-136.
    34. Faulkender, Michael & Flannery, Mark J. & Hankins, Kristine Watson & Smith, Jason M., 2012. "Cash flows and leverage adjustments," Journal of Financial Economics, Elsevier, vol. 103(3), pages 632-646.
    35. Edward I. Altman, 1968. "The Prediction Of Corporate Bankruptcy: A Discriminant Analysis," Journal of Finance, American Finance Association, vol. 23(1), pages 193-194, March.
    36. Li-Kai (Connie) Liao & Tarun Mukherjee & Wei Wang, 2015. "Corporate Governance And Capital Structure Dynamics: An Empirical Study," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 38(2), pages 169-192, June.
    37. Soku Byoun, 2008. "How and When Do Firms Adjust Their Capital Structures toward Targets?," Journal of Finance, American Finance Association, vol. 63(6), pages 3069-3096, December.
    38. Ohlson, Ja, 1980. "Financial Ratios And The Probabilistic Prediction Of Bankruptcy," Journal of Accounting Research, Wiley Blackwell, vol. 18(1), pages 109-131.
    39. Peng Huang & Yue Lu & Robert Faff, 2021. "Social trust and the speed of corporate leverage adjustment: evidence from around the globe," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(2), pages 3261-3303, June.
    40. Devos, Erik & Rahman, Shofiqur & Tsang, Desmond, 2017. "Debt covenants and the speed of capital structure adjustment," Journal of Corporate Finance, Elsevier, vol. 45(C), pages 1-18.
    41. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    42. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    43. Wu, Kai & Lai, Seiwai, 2020. "Intangible intensity and stock price crash risk," Journal of Corporate Finance, Elsevier, vol. 64(C).
    44. Jeffrey W. Allen & Gordon M. Phillips, 2000. "Corporate Equity Ownership, Strategic Alliances, and Product Market Relationships," Journal of Finance, American Finance Association, vol. 55(6), pages 2791-2815, December.
    45. Steven Crawford & Ying Huang & Ningzhong Li & Ziyun Yang, 2020. "Customer Concentration and Public Disclosure: Evidence from Management Earnings and Sales Forecasts†," Contemporary Accounting Research, John Wiley & Sons, vol. 37(1), pages 131-159, March.
    46. Öztekin, Özde & Flannery, Mark J., 2012. "Institutional determinants of capital structure adjustment speeds," Journal of Financial Economics, Elsevier, vol. 103(1), pages 88-112.
    47. Ling Cen & Sudipto Dasgupta & Redouane Elkamhi & Raunaq S. Pungaliya, 2016. "Reputation and Loan Contract Terms: The Role of Principal Customers," Review of Finance, European Finance Association, vol. 20(2), pages 501-533.
    48. Flannery, Mark J. & Rangan, Kasturi P., 2006. "Partial adjustment toward target capital structures," Journal of Financial Economics, Elsevier, vol. 79(3), pages 469-506, March.
    49. Honda, Yuzo & Ohtani, Kazuhiro, 1986. "Modified Wald Tests in Tests of Equality between Sets of Coefficients in Two Linear Regressions under Heteroscedasticity," The Manchester School of Economic & Social Studies, University of Manchester, vol. 54(2), pages 208-218, June.
    50. Srinivasan Balakrishnan & Isaac Fox, 1993. "Abstract," Strategic Management Journal, Wiley Blackwell, vol. 14(1), pages 3-16, January.
    51. John R. Graham & Mark T. Leary, 2011. "A Review of Empirical Capital Structure Research and Directions for the Future," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 309-345, December.
    52. Hertzel, Michael G. & Li, Zhi & Officer, Micah S. & Rodgers, Kimberly J., 2008. "Inter-firm linkages and the wealth effects of financial distress along the supply chain," Journal of Financial Economics, Elsevier, vol. 87(2), pages 374-387, February.
    53. Lee, Sang Mook & Jiraporn, Pornsit & Song, Hakjoon, 2020. "Customer concentration and stock price crash risk," Journal of Business Research, Elsevier, vol. 110(C), pages 327-346.
    54. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-247, February.
    55. Joye Khoo & Robert B. Durand & Subhrendu Rath, 2017. "Leverage adjustment after mergers and acquisitions," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57, pages 185-210, April.
    56. An, Zhe & Chen, Chen & Li, Donghui & Yin, Chao, 2021. "Foreign institutional ownership and the speed of leverage adjustment: International evidence," Journal of Corporate Finance, Elsevier, vol. 68(C).
    57. Hasibul Chowdhury & Shofiqur Rahman & Harikumar Sankaran, 2021. "Leverage deviation from the target debt ratio and leasing," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(2), pages 3481-3515, June.
    58. Jesse A. Ellis & C. Edward Fee & Shawn E. Thomas, 2012. "Proprietary Costs and the Disclosure of Information About Customers," Journal of Accounting Research, Wiley Blackwell, vol. 50(3), pages 685-727, June.
    59. Bing Zhou & Yumeng Li & Shengzhong Huang & Sidai Guo & Bing Xue, 2019. "Customer Concentration and Corporate Innovation: Effects of Financing Constraints and Managers’ Expectation of Chinese Listed Companies," Sustainability, MDPI, vol. 11(10), pages 1-19, May.
    60. Kim, Jeong-Bon & Li, Leye & Lu, Louise Yi & Yu, Yangxin, 2016. "Financial statement comparability and expected crash risk," Journal of Accounting and Economics, Elsevier, vol. 61(2), pages 294-312.
    61. Dhaliwal, Dan & Judd, J. Scott & Serfling, Matthew & Shaikh, Sarah, 2016. "Customer concentration risk and the cost of equity capital," Journal of Accounting and Economics, Elsevier, vol. 61(1), pages 23-48.
    62. Gan, Liu & Lv, Wujun & Chen, Yifei, 2021. "Capital structure adjustment speed over the business cycle," Finance Research Letters, Elsevier, vol. 39(C).
    63. Chang, Ya-Kai & Chou, Robin K. & Huang, Tai-Hsin, 2014. "Corporate governance and the dynamics of capital structure: New evidence," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 374-385.
    64. Toni M. Whited & Guojun Wu, 2006. "Financial Constraints Risk," The Review of Financial Studies, Society for Financial Studies, vol. 19(2), pages 531-559.
    65. Zhou, Qing & Tan, Kelvin Jui Keng & Faff, Robert & Zhu, Yushu, 2016. "Deviation from target capital structure, cost of equity and speed of adjustment," Journal of Corporate Finance, Elsevier, vol. 39(C), pages 99-120.
    66. Pan, Jianping & Yu, Manjiao & Liu, Jiayuan & Fan, Rui, 2020. "Customer concentration and corporate innovation: Evidence from China," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    67. J. Fitzgerald & J. Ryan, 2019. "The impact of firm characteristics on speed of adjustment to target leverage: a UK study," Applied Economics, Taylor & Francis Journals, vol. 51(3), pages 315-327, January.
    68. An, Zhe & Li, Donghui & Yu, Jin, 2015. "Firm crash risk, information environment, and speed of leverage adjustment," Journal of Corporate Finance, Elsevier, vol. 31(C), pages 132-151.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dang, Tung Lam & Dang, Viet Anh & Moshirian, Fariborz & Nguyen, Lily & Zhang, Bohui, 2019. "News media coverage and corporate leverage adjustments," Journal of Banking & Finance, Elsevier, vol. 109(C).
    2. Trung K. Do & Henry Hongren Huang & Te-Chien Lo, 2023. "Does corporate social responsibility affect leverage adjustments?," Review of Quantitative Finance and Accounting, Springer, vol. 60(4), pages 1569-1604, May.
    3. Shofiqur Rahman, 2020. "Credit supply and capital structure adjustments," Financial Management, Financial Management Association International, vol. 49(4), pages 949-972, December.
    4. Wenlian Gao & Feifei Zhu & Kai Chen, 2023. "The role of bank lenders in firm leverage adjustments," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 46(1), pages 63-97, February.
    5. An, Zhe & Chen, Chen & Li, Donghui & Yin, Chao, 2021. "Foreign institutional ownership and the speed of leverage adjustment: International evidence," Journal of Corporate Finance, Elsevier, vol. 68(C).
    6. Morais, Flávio & Serrasqueiro, Zélia & Ramalho, Joaquim J.S., 2022. "Capital structure speed of adjustment heterogeneity across zero leverage and leveraged European firms," Research in International Business and Finance, Elsevier, vol. 62(C).
    7. Tongxia Li & Chun Lu, 2023. "Local social environment and the speed of leverage adjustment," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(2), pages 1919-1952, June.
    8. Niu, Yuhao & Wang, Sai & Wen, Wen & Li, Sifei, 2023. "Does digital transformation speed up dynamic capital structure adjustment? Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    9. Durand, Robert B. & Greene, William H. & Harris, Mark N. & Khoo, Joye, 2022. "Heterogeneity in speed of adjustment using finite mixture models," Economic Modelling, Elsevier, vol. 107(C).
    10. Ho, Ly & Bai, Min & Lu, Yue & Qin, Yafeng, 2021. "The effect of corporate sustainability performance on leverage adjustments," The British Accounting Review, Elsevier, vol. 53(5).
    11. Bontempi, Maria Elena & Bottazzi, Laura & Golinelli, Roberto, 2020. "A multilevel index of heterogeneous short-term and long-term debt dynamics," Journal of Corporate Finance, Elsevier, vol. 64(C).
    12. Devos, Erik & Rahman, Shofiqur & Tsang, Desmond, 2017. "Debt covenants and the speed of capital structure adjustment," Journal of Corporate Finance, Elsevier, vol. 45(C), pages 1-18.
    13. Im, Hyun Joong & Faff, Robert & Ha, Chang Yong, 2022. "Uncertainty, investment spikes, and corporate leverage adjustments," Journal of Banking & Finance, Elsevier, vol. 145(C).
    14. Biswajit Ghose & Kailash Chandra Kabra, 2020. "Does Growth Affect Firms’ Leverage Adjustment Speed? A Study of Indian Firms," Business Perspectives and Research, , vol. 8(2), pages 139-155, July.
    15. Aflatooni, Abbas & Ghaderi, Kaveh & Mansouri, Kefsan, 2022. "Sanctions against Iran, political connections and speed of adjustment," Emerging Markets Review, Elsevier, vol. 51(PB).
    16. Peng Huang & Yue Lu & Robert Faff, 2021. "Social trust and the speed of corporate leverage adjustment: evidence from around the globe," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(2), pages 3261-3303, June.
    17. M. E. Bontempi & L. Bottazzi & R. Golinelli, 2015. "Dynamic corporate capital structure behavior: empirical assessment in the light of heterogeneity and non stationarity," Working Papers wp988, Dipartimento Scienze Economiche, Universita' di Bologna.
    18. Biswajit Ghose & Kailash Chandra Kabra, 2018. "Dynamic Capital Structure Adjustments and Business Group Affiliations: Indian Evidence," Business Perspectives and Research, , vol. 6(1), pages 27-41, January.
    19. Giorgio Canarella & Stephen M. Miller, 2019. "Determinants of Optimal Capital Structure and Speed of Adjustment: Evidence from the U.S. ICT Sector," Working papers 2019-06, University of Connecticut, Department of Economics.
    20. Thao Nguyen & Min Bai & Greg Hou & Cameron Truong, 2021. "Speed of adjustment towards target leverage: evidence from a quantile regression analysis," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(4), pages 5073-5109, December.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:acctfi:v:63:y:2023:i:2:p:2035-2079. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/aaanzea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.