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Does a firm’s supplier concentration affect its cash holding?

Author

Listed:
  • Zhang, Xindong
  • Zou, Meifeng
  • Liu, Weimin
  • Zhang, Yuefei

Abstract

High supplier concentration (SC) of a firm can weaken the firm’s bargaining power, which reduces its profitability and internal funds. Also, high SC likely increases the firm’s exposure to supply shocks, which results in high costs of external financing. Consequently, high-SC firms will incline to hold more cash due to the precautionary concern. However, there is little research into the effect of SC on cash holdings. This paper investigates how SC affects cash holdings with Chinese firms over 2009–2016. We find that a firm’s cash holding increases with its SC. Further investigations show that this positive relation stems from the unfavorable impact of SC on trade credit and equity financing. Our results are robust to different tests including the instrumental variable approach and the propensity score matching. Our findings are new to the literature and help to explain the cash holding puzzle. Our study also indicates that choosing supplier concentration adequately is important in maintaining a firm’s financial health.

Suggested Citation

  • Zhang, Xindong & Zou, Meifeng & Liu, Weimin & Zhang, Yuefei, 2020. "Does a firm’s supplier concentration affect its cash holding?," Economic Modelling, Elsevier, vol. 90(C), pages 527-535.
    • Handle: RePEc:eee:ecmode:v:90:y:2020:i:c:p:527-535
    DOI: 10.1016/j.econmod.2020.01.025
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    Cited by:

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    3. Wongsinhirun, Nopparat & Chatjuthamard, Pattanaporn & Jiraporn, Pornsit & Lee, Sang Mook, 2024. "Customer concentration and shareholder litigation risk: Evidence from a quasi-natural experiment," Journal of Behavioral and Experimental Finance, Elsevier, vol. 41(C).
    4. Duan, Zhixin & Hu, Mingsheng, 2024. "Dig the treasure nearby: The impact of local supplier preference on trade credit financing," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 629-650.
    5. Chen, Zhongfei & Xie, Guanxia, 2022. "ESG disclosure and financial performance: Moderating role of ESG investors," International Review of Financial Analysis, Elsevier, vol. 83(C).
    6. Liu, Rui & Zheng, Linhao & Chen, Zheang & Cheng, Mengyao & Ren, Yuzhuo, 2024. "Digitalization through supply chains: Evidence from the customer concentration of Chinese listed companies," Economic Modelling, Elsevier, vol. 134(C).
    7. Tan, Jianhua & Chen, Tao & Zhang, Peng & Chan, Kam C., 2021. "Environmental rule enforcement and cash holdings: Evidence from a natural experiment," Economic Modelling, Elsevier, vol. 103(C).
    8. Atif, Muhammad & Nadarajah, Sivathaasan & Richardson, Grant, 2023. "Staggered adoption of stakeholder constituency statutes and corporate cash holdings in the U.S," Economic Modelling, Elsevier, vol. 124(C).
    9. Li, Wanli & Lai, Yin & Zhong, Yufen, 2024. "The closer the better: Supplier geographic proximity and corporate information disclosure violation," The North American Journal of Economics and Finance, Elsevier, vol. 69(PA).

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    More about this item

    Keywords

    Supplier concentration; Corporate cash holdings; Financial constraints;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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