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Customer-base concentration, profitability and distress across the corporate life cycle

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  • Irvine, Paul
  • Park, Shawn Saeyeul
  • Yildizhan, Celim

Abstract

Using a recently expanded data set on supplier-customer links, we examine how customer concentration affects firm profitability. We find that the relation between customer concentration and firm profitability is more complex than recent literature suggests. We confirm that customer concentration promotes operating efficiencies for profitable firms. However, we �find a different result for younger, less profitable �firms where customer concentration impairs firm profitability and can increase distress risk. We explain these differences by introducing a relationship life-cycle hypothesis wherein the relation between customer-base concentration and profitability is time-varying; being significantly negative in the early years of the relationship, and turning positive as the relationship matures. The key driver of this dynamic is the customer-specific investments the relationship entails. These investments result in larger �fixed costs and greater operating leverage early in the relationship, but can significantly benefit the firm as the relationship matures.

Suggested Citation

  • Irvine, Paul & Park, Shawn Saeyeul & Yildizhan, Celim, 2013. "Customer-base concentration, profitability and distress across the corporate life cycle," MPRA Paper 58435, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:58435
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    Cited by:

    1. Zhiqi Chen & Xiaoqiao Wang, 2020. "Specific investment, supplier vulnerability and profit risks," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(9-10), pages 1215-1237, October.
    2. Yan Chen & Yingying Xin & Zhengying Luo & Min Han, 2021. "The Impact of Stable Customer Relationships on Enterprises’ Technological Innovation Based on the Mediating Effect of the Competitive Advantage of Enterprises," Sustainability, MDPI, vol. 13(7), pages 1-24, March.
    3. Jiangming Ma & Di Gao, 2023. "The Impact of Sustainable Supply-Chain Partnership on Bank Loans: Evidence from Chinese-Listed Firms," Sustainability, MDPI, vol. 15(6), pages 1-25, March.
    4. Kee-Hong Bae & Jin Wang, 2015. "Why Do Firms in Customer–Supplier Relationships Hold More Cash?," International Review of Finance, International Review of Finance Ltd., vol. 15(4), pages 489-520, December.

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    More about this item

    Keywords

    Customer concentration; customer-specific investment; selling; general and administrative expense; profitability; default risk; Celim Yildizhan; Paul Irvine; Shawn Saeyeul Park;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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