Customer Concentration And Financing Constraints

Firms always seek funds for their valuable investments,and the strategic interactions with their customers matter in the process.At present,a number of studies have investigated how such interactions with customers should impact firm’s financing condition as well as capital structure.The aim of this study is to extend these researches by further investigating the influence of customer concentration on firm financing constraints--a topic that has received widespread attention in the Chinese market.In China,the relationship between companies and customers is heavily influenced by "guanxi" culture and may have an even more profound impact on corporate financing activities.Although customer concentration has an important impact on corporate financing activities,the question on how customer concentration affects corporate financing constraints is still largely unanswered.The theoretical literature yields conflicting predictions on the effect of customer concentration on financing constraints.The first is the "collaborative effect" of customer concentration,that is,customer concentration will alleviate corporate financing constraints;The second is the "bargaining effect" of customer concentration,that is,customer concentration will intensify the firm’s financing constraints.Due to the conflicting predictions above,this paper intends to empirically assess the causal effect of concentrated customers on the financing constraints.We begin the analysis by estimating a baseline regression model using a broad sample of listed firm in China over the years 2003-2019.Based on previous research,we measure financing constraints using three proxy variables,namely AKZ,KZ,and OCF.In addition,for robustness,we measure customer concentration using two proxies,CS and CHHI.We find that changes in customer concentration is positively associated with changes in financing constraints,and the result is robust after controlling for a list of time-varying determinants of financing constraints.However,due to the possible endogenous relationship between customer concentration and financing constraints,the above research methods may have validity problems.To mitigate endogeneity concerns and establish causality,we employ an instrumental variables(IV)approach that employs the M&A activity in customers’ industries(downstream M&A)as an instrument for customer concentration.As discussed in Campello and Gao(2017),the downstream M&A activity can serve as a reasonable IV because it is not a policy variable for suppliers and need not affect their financing conditions through channels other than supplier-customer interactions.Our estimation also confirms that upstream firms do observe higher customer-base concentration following high levels of M&A activity in downstream industries.We then conduct the two-stage least squares(2SLS)regression using this IV,and the regression results allay the endogeneity concerns on the effect of customer concentration on the financing constraints of supplier firms.The adverse effect of customer concentration indicates that the bargaining effect generally dominates the collaboration effect.This dominant bargaining effect is also supported by our additional empirical evidences,such as the impact of customer concentration on the accounts receivable,the receivable turnover,as well as the horizontal M&A activity of supplier firms.Therefore,our empirical results show that a firm’s financing constraints usually deteriorate with increasing customer concentration,which usually magnifies the bargaining power of the main customer in the supplier’s interaction with the customer.The adverse effects of customer concentration on financing constraints may vary in different firms,and firm’s ownership and firm’s size are two factors.Therefore,my paper further examines the role of firm size and ownership in the relationship between customer concentration and firm’s financing constraints.This paper finds that,compared with state-owned firms and large firms,the financing constraints of non-state-owned firms and small companies are more likely to be affected by the "bargaining effect" of customer concentration.The results extend the research direction of the impact of customer relationship on financing activities.The existing literature holds that there are two contradictory effects of customer concentration,namely,the collaboration effect and the bargaining effect.My paper further supports the bargaining effect dominants in strategic supplier-customer interactions.Secondly,my paper studies the impact of customer concentration on corporate financing constraints,which enriches the related research of corporate financing constraints.The results show that high customer concentration usually enhances the bargaining power of downstream customers in the supplier-customer interactions,leading to the deterioration of upstream firms’ financing constraints.The research results may provide a new sight for firms to manage the customer relationship and alleviate the financing constraints.