Customer Concentration and Loan Contract Terms
Journal of Financial Economics, Forthcoming
65 Pages Posted: 29 May 2014 Last revised: 13 Aug 2016
Date Written: March 8, 2016
We study pricing and non-pricing features of loan contracts to gauge how the credit market evaluates a firm's customer-base profile and supply-chain relations. Higher customer concentration increases interest rate spreads and the number of restrictive covenants featured in newly-initiated as well as renegotiated bank loans. Customer concentration also abbreviates the maturity of those loans as well as the relationship between firms and their banks. These effects are intensified by customers' financial distress, the level of relationship-specific investments, and the use of trade credit in customer--supplier relations. Our evidence shows that a deeper exposure to a small set of large customers bears negative consequences for a firm's relations with its creditors, revealing limits to integration along the supply chain.
Keywords: Customer Concentration, Bank Loans, Contract Terms, Financial Distress, Instrumental Variables, Fixed Effects
JEL Classification: G21, G30, G32
Suggested Citation: Suggested Citation