Customer Concentration and Stock Price Crash Risk

Topic:

Customer Concentration and Stock Price Crash Risk

Time&Date: 

10:00-12:00pm, 2018/8/10

Venue:

Room A619, Teaching A

Speaker:

Dr. Jingran Zhao, Hong Kong Polytechnic University

We investigate whether the presence of major corporate customers, one of the most important firm stakeholders, affect firm stock price crashrisk. Using data on a large sample of U.S. firms from 1979 to 2014, we find that customer concentration is significantly and positively associated with future stock price crash risk. The results hold in various robustness checks and endogeneity tests. This positive association is primarily driven by suppliers in the durable goods sector and is attenuated among firms that report high R&D expenses. Finally, we find that firms with a higher degree of customer concentration are more likely to disclose unexpected very bad news. Overall, our findings suggest that the presence of major customers imposes performance pressure on managers, which induces them to hoard bad news. Once a tipping point has been reached, the bad news is released all at once, leading to a stock price crash.