Abstract

http://ssrn.com/abstract=2391935
 


 



Customer Concentration Risk and the Cost of Equity Capital


Dan S. Dhaliwal


University of Arizona - Department of Accounting

J. Scott Judd


University of Arizona - Department of Accounting

Matthew A. Serfling


University of Arizona - Department of Finance

Sarah Shaikh


University of Arizona - Department of Accounting

February 11, 2014


Abstract:     
This study investigates the relation between customer concentration and a supplier’s cost of equity capital. We argue that a more concentrated customer base increases a supplier’s cash flow risk, which should result in a higher cost of equity. Our results show a positive association between customer concentration and a supplier’s cost of equity, and this relation is more pronounced for suppliers that are more likely to lose major customers or that are more prone to larger losses if they lose such customers. Further, results from a propensity score matched sample analysis and instrumental variables regressions imply that our findings are robust to accounting for endogeneity. We also provide evidence that a supplier with a concentrated base of safer government customers has a lower cost of equity. Finally, we document a positive relation between customer concentration and a supplier’s cost of debt. Overall, our findings suggest that the composition and concentration of a supplier’s customer base significantly impact its financing costs.

Number of Pages in PDF File: 59

Keywords: Cost of equity, Cost of debt, Customer concentration, Business risk, Customer, Supplier

JEL Classification: G12, M41

working papers series


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Date posted: February 7, 2014 ; Last revised: February 15, 2014

Suggested Citation

Dhaliwal, Dan S. and Judd, J. Scott and Serfling, Matthew A. and Shaikh, Sarah, Customer Concentration Risk and the Cost of Equity Capital (February 11, 2014). Available at SSRN: http://ssrn.com/abstract=2391935 or http://dx.doi.org/10.2139/ssrn.2391935

Contact Information

Dan S. Dhaliwal
University of Arizona - Department of Accounting ( email )
McClelland Hall
PO Box 210108
Tucson, AZ 85721
United States
Joshua Scott Judd
University of Arizona - Department of Accounting ( email )
Tucson, AZ 85721
United States
Matthew A. Serfling (Contact Author)
University of Arizona - Department of Finance ( email )
McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
Sarah Shaikh
University of Arizona - Department of Accounting ( email )
Tucson, AZ 85721
United States
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