Abstract
This paper investigates the link between a firm's customer-base concentration and its stock return volatility. We find that firms with relatively more concentrated customer bases have higher idiosyncratic volatility. These results are economically significant, with an 11-15% increase in idiosyncratic volatility for concentrated versus diversified customer-base firms. In addition, we document significant temporal and cross-sectional variation in customer-base concentration effects across customer and supplier firm dimensions, including customer type (corporate versus government), customer default probability, extended trade credit to customers, and industry product market competition. Our results are robust to potential endogeneity concerns, different estimation methodologies and volatility measures, among numerous other robustness checks. Overall, our results contribute to the understanding of idiosyncratic volatility sources in a firm's stock returns and provide new evidence on the transmission of firm-specific shocks in a supply-chain network environment.
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