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

Paul Irvine, Shawn Saeyeul Park and Celim Yildizhan

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Customer concentration; customer-specific investment; selling; general and administrative expense; profitability; default risk; Celim Yildizhan; Paul Irvine; Shawn Saeyeul Park (search for similar items in EconPapers)
JEL-codes: G31 G33 L25 M41 (search for similar items in EconPapers)
Date: 2013-10-10
New Economics Papers: this item is included in nep-bec
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Customer-base concentration, profitability and distress across the corporate life cycle (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:58435

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