Two essays on customer concentration and stock price crash risk

Abstract

My thesis consists of two essays investigating the relation between customer concentration and stock price crash risk. By classifying major customers as corporate major customers and government major customers, I aim to show how these two types of customer concentration affect firm stock price crash risk through the managerial bad news hoarding channel. Essay one examines the relation between corporate customer concentration and stock price crash risk. Previous research offers conflicting views on the impact that corporate major customers have on managers' bad news hoarding (e.g., Hui, Klasa, and Yeung 2012; and Raman and Shahrur 2008). Using a large sample of U.S. firms from 1979 through 2014, I find that corporate customer concentration is significantly and positively associated with stock price crash risk. To address the causality, I use lagged industry averages as instruments for corporate customer concentration following Dhaliwal, Judd, Serfling, and Shaikh (2016). Further, the positive association between corporate customer concentration and crash risk arises primarily from suppliers in the durable goods sector and those with no research and development (R&D) expenses. Finally, I find that firms with a higher degree of corporate customer concentration are more likely to disclose unexpected very bad news. All my findings suggest that corporate customer concentration gives managers' incentive to hoard bad news, which, when reaching a tipping point, is released all at once, leading to stock price crash. Essay two examines the relation between government customer concentration and stock price crash risk. Prior studies imply a negative effect of government customer concentration on stock price crash risk (e.g., Chaney, Faccio, and Parsley 2011; and Ramanna and Roychowdhury 2010). Using a sample of U.S. supplier firms for the period 1979 through 2014, I provide evidence that government customer concentration is significantly and negatively associated with stock price crash risk. My findings suggest that government customer concentration creates a disincentive for managers to hide bad news, thereby reducing the likelihood of stock price crash.