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Why Do Firms in Customer–Supplier Relationships Hold More Cash?

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  • Kee-Hong Bae
  • Jin Wang

Abstract

A firm is in customer–supplier relationships when its business depends on a small number of major customers/suppliers. In this paper, we provide evidence that relationship-specific investments undertaken by firms in customer–supplier relationships are associated with high cash holdings in these firms. The evidence is consistent with the prediction of Titman's stakeholder theory that a firm relying on relationship-specific investments maintains a high cash reserve as a cushion to sustain its relationship-specific investments when negative shocks occur. Our findings suggest that relationship-specific investments are important determinants of the precautionary motive to hold cash.

Suggested Citation

  • Kee-Hong Bae & Jin Wang, 2015. "Why Do Firms in Customer–Supplier Relationships Hold More Cash?," International Review of Finance, International Review of Finance Ltd., vol. 15(4), pages 489-520, December.
    • Handle: RePEc:bla:irvfin:v:15:y:2015:i:4:p:489-520
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    References listed on IDEAS

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    Cited by:

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    3. Tan, Jianhua & Wang, Xiongyuan & Chan, Kam C., 2020. "Does a national reform of a logistics system matter in corporate cash management? Evidence from logistics service standardization in China," Pacific-Basin Finance Journal, Elsevier, vol. 63(C).
    4. Jhang, Shih-Sian (Sherwin) & Ogden, Joseph P. & Suresh, Nallan C., 2019. "Operational and financial configurations contingent on market power status," Omega, Elsevier, vol. 88(C), pages 91-109.
    5. Kim, Taeyeon & Kim, Hyun-Dong & Park, Kwangwoo, 2023. "Agency costs of customer concentration," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 533-558.
    6. Fang Chen & Jian Huang & Jianjun Jia, 2022. "Cash Holdings along the Supply Chain: The Downstream Evidence," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 46(2), pages 452-471, April.
    7. Kim, Taeyeon & Kim, Hyun-Dong & Park, Kwangwoo, 2023. "Customer concentration and firm risk: The role of outside directors from a major customer," Journal of Banking & Finance, Elsevier, vol. 152(C).

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