Summary of “Customer-Base Concentration: Implications for Firm Performance and Capital Markets”

Summary of “Customer-Base Concentration: Implications for Firm Performance and Capital Markets”

In the research paper “Customer-Base Concentration: Implications for Firm Performance and Capital Markets,” author Panos Patatoukas investigate how supplier fundamental and stock market valuation can be conditioned by its custom-base concentration. Customer-base is the group of customers that a business serves, and concentration refers to a situation in which suppliers rely upon a restricted group of customers. Older research saw customer-base concentration negatively, marking this relationship as deleterious for suppliers’ financial performances. Opposing this theory, Mr. Patatoukas suggests a positive association that is related to increased efficiency for the supplier.

Mr. Patatoukas confutes the old view that customer pressure is always equivalent to lower prices, extended credit, and an increased quantity of goods in inventories. The author document a positive association, and also states that if customer-base concentration results in lower gross margins, then the relationship bring considerable benefits. In fact, the research shows that suppliers with concentrated customer bases have lower selling, general, and administrative expenses than suppliers with more diversified customer base. Moreover, they have higher turnover rates on current and noncurrent assets, and overall they appear more profitable.

For this research the author use a sample from FASB’s and SEC’s requirements about the revenue from each major customer. Financial services were excluded from the sample due their nature and the consequently and artificial separation between financial and operating activities. Further, suppliers with negative operating margins and negative book value of equity were excluded. This leaves the sample with 45,442 business to business relations and a total of 25,389 suppliers. The data are collected in a range of time between 1977 and 2006.

The research represents a...