Managing Liquidity Along the Supply Chain: Supplier-Base Concentration and Corporate Cash Policy

Abstract

This paper studies the relation between supplier-base concentration and corporate cash policy, using unique data on supplier information disclosed by Chinese listed firms between 2007 and 2020. We find that customer firms with more concentrated supplier bases tend to hold higher levels of cash reserves, even after controlling for potential endogenous effects and using alternative measures of supplier-base concentration and cash holdings. We also show that the positive relation between supplier-base concentration and cash holdings is more pronounced for firms with higher market competition, worse inventory efficiency, more relationship-specific investment, and central positions in the production networks. Furthermore, we find that supplier-base concentration increases firms’ cash reserves from debt borrowings and firms’ cash spending on R&D investment. Our study contributes to the supply chain management and liquidity management literature by highlighting the importance of supplier structure in shaping corporate cash policy. These insights have important implications for managers looking to optimize their firms’ cash policy.

Keywords: Supplier-base Concentration, Cash Holdings, Source of Cash, Use of Cash