Customer Concentration Risk and the Cost of Equity Capital

56 Pages Posted: 7 Feb 2014 Last revised: 27 Mar 2015

Dan S. Dhaliwal

University of Arizona - Department of Accounting

J. Scott Judd

University of Illinois at Chicago

Matthew Serfling

University of Tennessee

Sarah Shaikh

University of Washington

Date Written: March 23, 2015

Abstract

This study investigates the relation between customer concentration and a supplier’s cost of equity capital. We hypothesize that a more concentrated customer base increases a supplier’s risk, which results 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 corporate 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.

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

JEL Classification: G12, M41

Suggested Citation

Dhaliwal, Dan S. and Judd, J. Scott and Serfling, Matthew and Shaikh, Sarah, Customer Concentration Risk and the Cost of Equity Capital (March 23, 2015). Journal of Accounting & Economics (JAE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2391935 or http://dx.doi.org/10.2139/ssrn.2391935

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 Illinois at Chicago ( email )

601 S Morgan St. 2302 UH
Chicago, IL 60607
United States

Matthew Serfling (Contact Author)

University of Tennessee ( email )

Haslam College of Business
Knoxville, TN 37996
United States
865-974-1952 (Phone)

Sarah Shaikh

University of Washington ( email )

Seattle, WA WA
United States

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