Customer concentration types and public debt contracts

Purpose - This paper aims to examine how a firm’s customer concentration, which is the amount of sales between a supplier firm and the major customers, affects corporate bond contracts. This study also investigates how the types of customer concentration have a significant impact on bond contracts. Design/methodology/approach - The research uses the Compustat’s segment customer database and the Mergent fixed income securities database, which provides details about publicly offered US bond issues and issuers. The sample also includes the US Congressional committees’ data from the 96th to 115th congresses. To control any endogenous concerns, the author uses changes in the seniority of US senators on powerful committees and the American Recovery and Reinvestment Act of 2009 (ARRA) as exogenous shocks. For a robustness test, the author also uses the propensity score-matched pairs. Findings - While higher customer concentration, on average, leads to higher yield spreads and strict covenants, firms that have the US Government as a major customer pay lower yield spreads and have higher issue ratings. However, as a firm’s sales depend too heavily on the US Government customer channel, the bond issuance is likely to have lower issue ratings. The main findings also show that firms with government concentrations take advantage of political links, leading to lower yield spreads after two exogenous events. Originality/value - The findings in this paper show the importance of a firm’s customer types in bond markets by emphasizing the positive impact of the US Government as the sales channel. Exogenous event studies based on the propensity-matched sample alleviate the endogenous concerns.