56 Pages Posted: 7 Feb 2014 Last revised: 27 Mar 2015
Date Written: March 23, 2015
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: 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