The effect of major customer concentration on firm profitability: competitive or collaborative?

Kai Wai Hui, Chuchu Liang and P. Eric Yeung ()
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Kai Wai Hui: The University of Hong Kong
Chuchu Liang: University of California, Irvine
P. Eric Yeung: Cornell University

Review of Accounting Studies, 2019, vol. 24, issue 1, No 6, 189-229

Abstract: Abstract We test two potential hypotheses regarding the effects of major customer concentration on firm profitability. Under the collaboration hypothesis, customer power facilitates collaboration, and both the supplier firm and its major customers obtain benefits. Under the competition hypothesis, customer power results in rent extraction, and the major customers benefit at the expense of the supplier firm. We document that major customer concentration is negatively associated with the supplier firm’s profitability but positively associated with the major customers’ profitability. We demonstrate that these effects weaken as the supplier firm’s own power grows over its relationship with major customers, supporting the competition hypothesis. We carefully reconcile our results with prior studies’ findings that focus only on the supplier firm’s profitability and identify their research design and interpretation problems. We obtain similar inferences in a setting of major customers’ horizontal mergers and when we use an alternative measure of major customer power.

Keywords: Fundamental analysis; Customer concentration; Supply-chain competition; Firm profitability; Mergers and acquisitions; G34; G32; M41 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (26)

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DOI: 10.1007/s11142-018-9469-8

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