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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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    File URL: http://hdl.handle.net/10.1111/irfi.12058
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    References listed on IDEAS

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    Cited by:

    1. 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.

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