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Customer concentration, institutions, and corporate bond contracts

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  • Chenyan Liu
  • Zuoping Xiao
  • Hong Xie

Abstract

We examine the effect of customer concentration, the quality of institutions, and their interaction on corporate bond contract terms in China. We find that higher customer concentration is associated with higher bond spreads, shorter bond maturity, and more bond covenants. In contrast, better institutions are associated with lower bond spreads, longer bond maturity, and fewer bond covenants. Moreover, we find that the adverse or unfavourable association between customer concentration and bond contract terms is weakened for firms operating within better institutions or for firms whose ultimate owners are the Central Government of China. Furthermore, the adverse association between customer concentration and bond contract terms is more pronounced when a supplier's major customers have lower switching costs or when the supplier has made more relationship‐specific investments. Finally, our main results are robust to controls for endogeneity concerns and other sensitivity checks. Overall, our findings suggest that bondholders view customer concentration as a risk factor but better institutions as a protection.

Suggested Citation

  • Chenyan Liu & Zuoping Xiao & Hong Xie, 2020. "Customer concentration, institutions, and corporate bond contracts," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 25(1), pages 90-119, January.
    • Handle: RePEc:wly:ijfiec:v:25:y:2020:i:1:p:90-119
    DOI: 10.1002/ijfe.1731
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    Cited by:

    1. Zhanguang Chen & Qiaowan Wang & Chao Dou & Tian Liang, 2020. "Government Background Customers and Private Enterprise Innovation from the Perspective of Supply Chain Risk Transmission," Sustainability, MDPI, vol. 12(8), pages 1-22, April.
    2. Wang, Lu & Su, Zhong-qin & Fung, Hung-Gay & Jin, Hong-min & Xiao, Zuoping, 2021. "Do CEOs with academic experience add value to firms? Evidence on bank loans from Chinese firms," Pacific-Basin Finance Journal, Elsevier, vol. 67(C).
    3. Jamal A. Al‐Khasawneh & Paul Dion & Naceur Essaddam & Tashfeen Hussain, 2023. "Is the cost of equity a mere function of leverage? The case of bond IPOs," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 58-78, January.
    4. Guo, Hongling & Sun, Yue & Qiu, Xuemei, 2021. "Cross-shareholding network and corporate bond financing cost in China," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    5. Han-Ting Wang & Sze-Ting Chen, 2020. "The Impact of CEO Competence Heterogeneity and Investor Risk Appetite on Corporate Bond Yield- Take the Listed Companies of the Real Estate Industry as an Example," International Journal of Business and Administrative Studies, Professor Dr. Bahaudin G. Mujtaba, vol. 6(4), pages 183-200.
    6. Su, Kun & Zhao, Yan & Wang, Yinghui, 2024. "Customer concentration and corporate financialization: Evidence from non-financial firms in China," Research in International Business and Finance, Elsevier, vol. 68(C).

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