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Customer-Base Concentration: Implications for Firm Performance and Capital Markets

49 Pages Posted: 29 Aug 2010 Last revised: 11 Apr 2014

Panos N. Patatoukas

University of California, Berkeley - Haas School of Business

Date Written: May 24, 2011

Abstract

This study investigates whether and how customer-base concentration affects supplier firm fundamentals and stock market valuation. I compile a comprehensive sample of supply chain relationships and develop a measure (CC) to capture the extent to which a supplier’s customer base is concentrated. In contrast to the conventional view of customer-base concentration as an impediment to supplier firm performance, I document a positive contemporaneous association between CC and accounting rates of return, suggesting that efficiencies accrue to suppliers with concentrated customer bases. Consistent with a cause-and-effect link between customer-base concentration and supplier firm performance, analysis of intertemporal changes demonstrates that CC increases predict efficiency gains in the form of reduced operating expenses per dollar of sales and enhanced asset utilization. Using stock returns tests, I find that investors underreact to the implications of changes in customer-base concentration for future firm fundamentals when setting stock prices. A trading strategy that exploits investors’ underreaction yields abnormal stock returns over the thirty-year period studied.

Keywords: Customer-Base Concentration, Supply-Chain Collaboration, DuPont Analysis, Market Efficiency

JEL Classification: M41, L25, G14

Suggested Citation

Patatoukas, Panos N., Customer-Base Concentration: Implications for Firm Performance and Capital Markets (May 24, 2011). The Accounting Review, March 2012. Available at SSRN: https://ssrn.com/abstract=1666497

Panos Patatoukas (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

HOME PAGE: http://sites.google.com/site/panossom/

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