Customers and Cash: How Relationships Affect Suppliers’ Cash Holdings

Abstract

If one customer accounts for a large portion of a supplier’s sales, then the loss of that one customer can cripple the supplier’s financial health. As a precaution against the additional operating risk induced by being in an important relationship with a customer, I find that suppliers in such relationships hold more cash on average than suppliers that are not in important relationships. Additionally, suppliers’ cash holdings increase proportionately with the importance of their customer relationships. Being in an important relationship affects cash holdings and leverage differently, indicating that firms manage cash and debt for different purposes. I find that suppliers in relationships primarily accrue cash through issuance of stock as opposed to debt or retained earnings. The results highlight the importance of understanding buyer-supplier relationships when evaluating a firm’s financing policy.

Keywords: Buyer-supplier relationships, Relationship-Specific Investments, Cash Holdings

JEL Classification: G30, G32, L22