The Influence of Customer-Supplier Linkages on Stock Returns
42 Pages Posted: 5 Aug 2014 Last revised: 8 Aug 2014
Date Written: August 5, 2013
Investors in firms with concentrated supplier or customer bases should not assume that idiosyncratic shocks to an economically linked firm disappear in a well-diversified portfolio. Customer-supplier linkages between firms are a channel by which shocks to a single firm can influence the stock returns of other, linked firms. When the distribution of connectivity in a firm’s economic network is fat-tailed, individual firm-level shocks do not average out in aggregate. Consequently, firms with concentrated supplier or customer bases have higher average returns than firms with more diversified supplier or customer exposures.
Keywords: Customer-supplier linkages, economic linkages, diversification, stock returns
JEL Classification: G22, G23, C23
Suggested Citation: Suggested Citation