Customer concentration and shareholder litigation risk: Evidence from a quasi-natural experiment

Abstract

Capitalizing on a unique ruling by the Ninth Circuit Court of Appeals that unexpectedly raised the difficulty of shareholder litigation, we examine how an exogenous reduction in litigation risk influences customer concentration. A more concentrated base of customers is generally viewed as more risky. Our difference-in-differences estimates reveal that an unanticipated decline in litigation risk results in a more concentrated customer base. Firms less vulnerable to litigation risk possess the ability to strategically redirect resources that are typically reserved for legal contingencies. By reallocating these resources, these firms can enhance their capacity to cater to the needs of large customers more effectively. Consequently, this effective resource allocation serves as a magnet for attracting a greater number of major customers, thereby leading to elevated levels of customer concentration. Further analysis validates the results, including propensity score matching and entropy balancing.