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

Irvine, Paul and Park, Shawn Saeyeul and Yildizhan, Celim (2013): Customer-base concentration, profitability and distress across the corporate life cycle.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Customer concentration, customer-specific investment, selling, general and administrative expense, profitability, default risk, Celim Yildizhan, Paul Irvine, Shawn Saeyeul Park
• Subjects: G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting ; Fixed Investment and Inventory Studies ; Capacity; G - Financial Economics > G3 - Corporate Finance and Governance > G33 - Bankruptcy ; Liquidation; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L25 - Firm Performance: Size, Diversification, and Scope; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing > M41 - Accounting

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