The Effect of Major Customer Concentration on Firm Profitability: Competitive or Collaborative?

43 Pages Posted: 17 Jul 2018

See all articles by Kai Wai Hui

Kai Wai Hui

The University of Hong Kong (HKU) - Department of Accounting

Chuchu Liang

University of California, Irvine - Paul Merage School of Business

P. Eric Yeung

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: June 25, 2018

Abstract

We test two potential hypotheses regarding the effects of major customer concentration on firm profitability. Under the collaboration hypothesis, customer power facilitates collaboration and both the supplier firm and its major customers obtain benefits. Under the competition hypothesis, customer power results in rent extraction and the major customers benefit at the expense of the supplier firm. We document that major customer concentration is negatively associated with the supplier firm’s profitability but positively associated with the major customers’ profitability. We demonstrate that these effects weaken as the supplier firm’s own power grows over its relationship with major customers, supporting the competition hypothesis. We carefully reconcile our results with prior findings that focus only on the supplier firm’s profitability and identify their research design and interpretation problems. We obtain similar inferences in a setting of major customers’ horizontal mergers and when we use an alternative measure of major customer power.

Keywords: Fundamental analysis, Customer concentration, Supply-chain competition, Firm profitability, Merger and acquisition

Suggested Citation

Hui, Kai Wai and Liang, Chuchu and Yeung, P. Eric, The Effect of Major Customer Concentration on Firm Profitability: Competitive or Collaborative? (June 25, 2018). Available at SSRN: https://ssrn.com/abstract=3210767 or http://dx.doi.org/10.2139/ssrn.3210767

Kai Wai Hui

The University of Hong Kong (HKU) - Department of Accounting ( email )

Pokfulam Road
Hong Kong, Pokfulam
Hong Kong

Chuchu Liang

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697
United States

P. Eric Yeung (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

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