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Do firms' relationships with principal customers/suppliers affect shareholders' income?

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  • Wang, Jin

Abstract

In this paper, we examine whether a firm's relationship with its principal customers/suppliers affects its payout policies. A firm has customer–supplier relationships when its business depends on a small number of major customers/suppliers. The extant literature indicates two channels through which customer–supplier relationships might negatively affect a firm's dividend payments: 1) the high financial distress costs associated with relationship-specific investments and 2) the information certification effect of the principle customer. Consistent with expectations, our study reveals a negative relationship between a firm's dependence on customer–supplier relationships and its dividend payments. This result is robust to various model specifications and consistent with evidence regarding the time-series properties of dividends. Moreover, we find that high financial distress costs associated with relationship-specific investments are the key channel through which a firm's customer–supplier relationship affects its dividend payments. Overall, our results suggest that a firm's relationship with its non-financial stakeholders, such as principal customers/suppliers, is an important determinant of its shareholders' income.

Suggested Citation

  • Wang, Jin, 2012. "Do firms' relationships with principal customers/suppliers affect shareholders' income?," Journal of Corporate Finance, Elsevier, vol. 18(4), pages 860-878.
  • Handle: RePEc:eee:corfin:v:18:y:2012:i:4:p:860-878
    DOI: 10.1016/j.jcorpfin.2012.06.007
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Itzkowitz, Jennifer, 2015. "Buyers as stakeholders: How relationships affect suppliers' financial constraints," Journal of Corporate Finance, Elsevier, vol. 31(C), pages 54-66.
    2. 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.
    3. Lian, Yili, 2017. "Financial distress and customer-supplier relationships," Journal of Corporate Finance, Elsevier, vol. 43(C), pages 397-406.
    4. Mihov, Atanas & Naranjo, Andy, 2017. "Customer-base concentration and the transmission of idiosyncratic volatility along the vertical chain," Journal of Empirical Finance, Elsevier, vol. 40(C), pages 73-100.
    5. Mukherjee, Krishnendu, 2014. "Supplier selection criteria and methods: past, present and future," MPRA Paper 60079, University Library of Munich, Germany.
    6. Cen, Ling & Maydew, Edward L. & Zhang, Liandong & Zuo, Luo, 2017. "Customer–supplier relationships and corporate tax avoidance," Journal of Financial Economics, Elsevier, vol. 123(2), pages 377-394.
    7. 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.
    8. 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.

    More about this item

    Keywords

    Dividend; Customer; Supplier; Financial distress; Information certification;

    JEL classification:

    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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