Why Do Firms in Customer–Supplier Relationships Hold More Cash?

Kee-Hong Bae and Jin Wang

International Review of Finance, 2015, vol. 15, issue 4, 489-520

Abstract: A firm is in customer–supplier relationships when its business depends on a small number of major customers/suppliers. In this paper, we provide evidence that relationship-specific investments undertaken by firms in customer–supplier relationships are associated with high cash holdings in these firms. The evidence is consistent with the prediction of Titman's stakeholder theory that a firm relying on relationship-specific investments maintains a high cash reserve as a cushion to sustain its relationship-specific investments when negative shocks occur. Our findings suggest that relationship-specific investments are important determinants of the precautionary motive to hold cash.

Date: 2015
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International Review of Finance is currently edited by Bruce D. Grundy, Naifu Chen, Ming Huang, Takao Kobayashi and Sheridan Titman

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