Does a firm's supplier concentration affect its cash holdings?

Zhang, Xindong; Zou, Meifeng; Liu, Weimin; Zhang, Yuefei

Abstract

High supplier concentration (SC) of a firm can weaken the firm's bargaining power, which reduces its profitability and internal funds. Also, high SC likely increases the firm's exposure to supply shocks, which results in high costs of external financing. Consequently, high-SC firms will incline to hold more cash due to the precautionary concern. However, there is little research into the effect of SC on cash holdings. This paper investigates how SC affects cash holdings with Chinese firms over 2009-2016. We find that a firm's cash holding increases with its SC. Further investigations show that this positive relation stems from the unfavorable impact of SC on trade credit and equity financing. Our results are robust to different tests including the instrumental variable approach and the propensity score matching. Our findings are new to the literature and help to explain the cash holding puzzle. Our study also indicates that choosing supplier concentration adequately is important in maintaining a firm's financial health.

Citation

Zhang, X., Zou, M., Liu, W., & Zhang, Y. (2020). Does a firm's supplier concentration affect its cash holdings?. Economic Modelling, 90, 527-535. https://doi.org/10.1016/j.econmod.2020.01.025

• Journal Article Type: Article
• Acceptance Date: Jan 31, 2021
• Online Publication Date: Feb 1, 2020
• Publication Date: 2020-08
• Deposit Date: Jan 20, 2022
• Publicly Available Date: Jan 20, 2022
• Journal: Economic Modelling
• Print ISSN: 0264-9993
• Electronic ISSN: 1873-6122
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 90
• Pages: 527-535
• DOI: https://doi.org/10.1016/j.econmod.2020.01.025
• Keywords: Supplier concentration; Corporate cash holdings; Financial constraints
• Public URL: https://nottingham-repository.worktribe.com/output/7281538
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S0264999319309770#:~:text=We%20find%20that%20a%20firm's%20cash%20holding%20increases%20with%20its%20supplier%20concentration.&text=An%20adequate%20level%20of%20supplier%20diversification%20is%20helpful%20t
• Additional Information: This article is maintained by: Elsevier; Article Title: Does a firm’s supplier concentration affect its cash holding?; Journal Title: Economic Modelling; CrossRef DOI link to publisher maintained version: https://doi.org/10.1016/j.econmod.2020.01.025; Content Type: article; Copyright: © 2020 Published by Elsevier B.V.