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Agency costs of customer concentration

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  • Kim, Taeyeon
  • Kim, Hyun-Dong
  • Park, Kwangwoo

Abstract

We conjecture that managerial agency problems are aggravated in dependent suppliers with a few large customers, resulting in investors' lower assessment value to suppliers’ excess cash reserves. Using a sample of U.S. firms over the 1977–2016 period, we find that supplier firms with highly concentrated customers are more likely to have lower market value of excess cash. We further show that supplier firms with higher customer concentration provide greater CEO compensation, engage in more value-destroying mergers, and experience less forced CEO turnover. Our results add an agency view to the prevailing risk-based view of customer concentration in the existing literature.

Suggested Citation

  • Kim, Taeyeon & Kim, Hyun-Dong & Park, Kwangwoo, 2023. "Agency costs of customer concentration," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 533-558.
    • Handle: RePEc:eee:reveco:v:85:y:2023:i:c:p:533-558
    DOI: 10.1016/j.iref.2023.01.025
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    1. Kim, Taeyeon & Kim, Hyun-Dong & Park, Kwangwoo, 2023. "Customer concentration and firm risk: The role of outside directors from a major customer," Journal of Banking & Finance, Elsevier, vol. 152(C).

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    More about this item

    Keywords

    Customer concentration; Managerial agency costs; Value of excess cash; Relationship-specific investments;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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