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Financial distress and customer-supplier relationships

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  • Lian, Yili

Abstract

Using a customer-supplier matched sample from 1980 to 2014, I study the role of customer-supplier relationships on suppliers' financial distress. If a significant amount of a supplier's sales is tied to a major customer, the supplier's financial health is influenced by the major customer's financial conditions. I find that a supplier's probability of financial distress is positively related to its major customer's financial distress status. This relation persists up to two years after a major customer is in financial distress. Further, I show that the relationship is more pronounced when customer-supplier relationships are stronger, when a major customer is more likely to fail in the future, and when the supplier makes unique products. The results highlight the importance of understanding customer-supplier relationships when analyzing a firm's probability of financial distress.

Suggested Citation

  • Lian, Yili, 2017. "Financial distress and customer-supplier relationships," Journal of Corporate Finance, Elsevier, vol. 43(C), pages 397-406.
    • Handle: RePEc:eee:corfin:v:43:y:2017:i:c:p:397-406
    DOI: 10.1016/j.jcorpfin.2017.02.006
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    More about this item

    Keywords

    Customer-supplier relationships; Financial distress;

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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