Does Business Model Risk Affect Corporate Labor Policy?

In this study, we attempt to provide a key understanding on how and through which channel customer concentration (Business risk) affects managers’ employment decision efficiency. Understanding the costs associated with customer concentration is important, as the modern business-to-business economy continues to experience higher levels of concentration and supply-chain integration. We find that managers of firms with higher customer concentrations are less efficient in their hiring decisions. Our main results are robust when using exogenous shocks based on federal laws to address endogeneity concerns. Additionally, we provide evidence that this negative impact is more pronounced in firms that offer more trade credit to larger customers, have higher financial risk, invest heavily in research and development, or deal with customers at greater risk of default.