Customer Concentration and Stock Price Crash Risk

Abstract

We investigate the impact of customer concentration on stock price crash risk. Customer concentration may represent a source of significant cash flow and business risk for supplier firms or benefit supplier firms in terms of efficient product, inventory and supply chain management. Using a large sample of firms for the period of 1977-2016, we find that corporate customer concentration is positively associated with stock price crash risk. We find, however, that governmental customer concentration is negatively associated with stock price crash risk. Further analyses show that our results are robust to potential endogeneity and reverse causality concerns. In the cross-sectional analyses, we find that the likelihood that a supplier firm with concentrated customer base experiencing higher crash risk is attenuated by lower switching cost and is accentuated when the degree of information asymmetry is high.