Customer Concentration and Speed of Capital Structure Adjustments
49 Pages Posted: 12 Mar 2021 Last revised: 2 May 2021
Date Written: April 22, 2021
We examine whether and how commitment to major customers affects the speed of adjustment (SOA) to achieve its target capital structure. We find a negative association between the degree of customer concentration (CC) and supplier firm’s SOA, especially in overleveraged firms. The negative association is more pronounced in firms with financial constraints and liquidity pressure, low market share, and low cost in private information acquisitions. Besides, the adverse impact of CC on SOA is stronger when the suppliers are engaged in high relationship-specific investments. Finally, we identify the management earnings forecast as a mediating channel between CC and SOA. Our findings demonstrate that concentrated customers reduce the supplier firm’s SOA due to customer commitments.
Keywords: Customer Concentration, Capital Structure, Cash Flow Risk, Relationship-Specific Investments
JEL Classification: G32, G33, L14
Suggested Citation: Suggested Citation