Does Customer-base Structure Influence Managerial Risk-taking Incentives?
45 Pages Posted: 21 Aug 2015 Last revised: 11 May 2020
Date Written: January 10, 2020
We find strong evidence that when the customer base is more concentrated, the supplier firm’s CEO receives more risk-taking incentives in compensation. This finding is robust to numerous alternative specifications and to different approaches that mitigate endogeneity concerns. Further, we show that the positive effect of customer concentration is more prominent when the CEO is more reluctant to take risk, and when the supplier firm has more investment opportunities or is more prone to the costs of losing large customers. These findings are consistent with the notion that boards provide additional risk-taking incentives to offset the CEO’s aversion to the risk of a non-diversified revenue stream, thereby preventing excessive managerial conservatism at the expense of value maximization.
Keywords: Customer Base, Customer Risk, CEO Compensation, Vega, Risk-taking Incentive
JEL Classification: G34
Suggested Citation: Suggested Citation