Does Customer-base Structure Influence Managerial Risk-taking Incentives?

59 Pages Posted: 21 Aug 2015 Last revised: 8 Feb 2021

See all articles by Jie Chen

Jie Chen

Leeds University Business School, University of Leeds

Xunhua Su

Norwegian School of Economics (NHH)

Xuan Tian

Tsinghua University - PBC School of Finance

Bin Xu

University of Leeds

Date Written: February 10, 2021

Abstract

We find strong evidence that when a firm’s customer base is more concentrated, the firm’s CEO receives more risk-taking incentives in her compensation package. This finding is robust to numerous alternative measures, alternative specifications, alternative subsamples, and different attempts that mitigate endogeneity concerns. Further, the positive effect of customer concentration on CEO risk-taking incentive provision is more prominent when the CEO is more reluctant to take risks, when the firm has more investment opportunities, and when the firm 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 non-diversified revenue streams, 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

Chen, Jie and Su, Xunhua and Tian, Xuan and Xu, Bin, Does Customer-base Structure Influence Managerial Risk-taking Incentives? (February 10, 2021). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2648219 or http://dx.doi.org/10.2139/ssrn.2648219

Jie Chen

Leeds University Business School, University of Leeds ( email )

Leeds LS2 9JT
United Kingdom

HOME PAGE: http://https://business.leeds.ac.uk/about-us/our-people/staff-directory/profile/jie-chen-1/

Xunhua Su (Contact Author)

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway

HOME PAGE: http://sites.google.com/site/xunhuasu/

Xuan Tian

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China
+86-10-62794103 (Phone)

HOME PAGE: http://xuantian.info/

Bin Xu

University of Leeds ( email )

Leeds
United Kingdom

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