Customers and cash: How relationships affect suppliers' cash holdings |
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| Affiliation: | 1. University of International Business and Economics, China;2. Beijing Foreign Studies University, China;3. Cardiff University, UK;4. Faculty of Business and Economics, University of Hong Kong, Hong Kong;1. Smith School of Business, Queen''s University, Goodes Hall, K7L 3N6 Kingston, Ontario, Canada;2. Smith School of Business, Queen''s University, Kingston, Ontario, Canada;1. Sy Syms School of Business, Yeshiva University, New York, NY 10033, United Statesn;2. C. T. Bauer College of Business, University of Houston, Houston, TX 77204-6021, United Statesn;3. Von Allmen School of Accountancy, Gatton College of Business and Economics, University of Kentucky, Lexington, KY 40506, United States |
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| Abstract: | If one customer accounts for a large portion of a supplier's sales, then the loss of that one customer can cripple the supplier's financial health. As a precaution against the additional operating risk induced by being in an important relationship with a customer, I find that suppliers in such relationships hold more cash on average than suppliers that are not in important relationships. Additionally, supplier's cash holdings increase proportionately with the importance of their customer relationships. Being in an important relationship affects cash holdings and leverage differently, indicating that firms manage cash and debt for different purposes. I find that suppliers in relationships primarily accrue cash through issuance of stock as opposed to debt or retained earnings. The results highlight the importance of understanding buyer–supplier relationships when evaluating a firm's financing policy. |
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