Customer Power and Accounting Profitability

• In Event: Valuation

Abstract

Prior work finds that major customer concentration appears to be positively associated with supplier firms’ profitability, suggesting that customer power primarily facilitates supply-chain collaboration. We show that major customer power reduces the supplier firm’s profitability, consistent with the rent extraction effect of customer bargaining power. Customer power can be decomposed into supplier dispersion and customer concentration, both of which negatively affect the supplier firm’s profit margin and assets turnover. Supplier dispersion and customer concentration are also negatively associated with stock returns. We also show that sample selection bias contributes to the positive association between customer concentration and firm profitability observed in prior work and that the relationship life-cycle hypothesis of collaboration does not seem to be supported by our data.

Authors

• Kai Wai Hui, Hong Kong University of Sci & Tech

• Chuchu Liang, Cornell university

• Eric Yeung, Cornell University