Customer Concentration, Leverage Adjustments, and Firm Value

Abstract

We examine the relationship between customer concentration and capital structure adjustment speed using a sample of U.S. listed firms from 1977 to 2020. We found that the customer-concentrated firms have a lower speed of leverage adjustment. Customer concentration affects leverage adjustment speed mainly through increased cash flow volatility and asset specificity. The negative association is more pronounced in firms with high relationship-specific investments and low switching costs for their customers. Stock market reacts to leverage deviation strongly for firms with concentrated customers. Our findings highlight the vital role of customers as key stakeholders in capital structure decisions.

Keywords: customer concentration; capital structure; cash flow risk

JEL Classification: G32, G33, L14