Aggregation of Idiosyncratic Shocks in the Customer-Supplier Network

51 Pages Posted: 16 Sep 2020

See all articles by Donghyun Kim

Donghyun Kim

Chung-Ang University

Yi Liu

Sun Yat-sen University (SYSU)

Date Written: July 6, 2020


Using customer-supplier networks, we document a strong increase in stock return comovement between customer and supplier after the establishment of their relationship. This increase in comovement is mainly associated with cash flow news and firm-specific information. We find that the idiosyncratic shocks to customers diffuse through the customer-supplier network and aggregate into a systematic risk, which affects suppliers' expected returns. Using a long-short portfolio based on exposure to aggregated customer risk, we realize annual excess returns of 3.1% (value-weighted) and 6.11% (equal-weighted), respectively. The customer risk factor cannot be explained by market, size, book-to-market, or momentum factor. Consistently, we also find a positive relationship between exposure to the customer risk factor and cost of equity capital.

Keywords: aggregation, idiosyncratic return, customer-supplier, granular network

JEL Classification: G12, L16

Suggested Citation

Kim, Donghyun and Liu, Yi, Aggregation of Idiosyncratic Shocks in the Customer-Supplier Network (July 6, 2020). Available at SSRN: or

Donghyun Kim (Contact Author)

Chung-Ang University ( email )

221 Heuksuk-dong
Seoul, 156-756
Korea, Republic of (South Korea)

Yi Liu

Sun Yat-sen University (SYSU)

135, Xingang Xi Road
Guangzhou, Guangdong 510275

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