Agency costs of customer concentration

We conjecture that managerial agency problems are aggravated in dependent suppliers with a few large customers, resulting in investors' lower assessment value to suppliers' excess cash reserves. Using a sample of U.S. firms over the 1977-2016 period, we find that supplier firms with highly concentrated customers are more likely to have lower market value of excess cash. We further show that supplier firms with higher customer concentration provide greater CEO compensation, engage in more value-destroying mergers, and experience less forced CEO turnover. Our results add an agency view to the prevailing risk-based view of customer concentration in the existing literature.