Why Do Firms in Customer–Supplier Relationships Hold More Cash?

32 Pages Posted: 19 Jan 2016

See all articles by Kee‐Hong Bae

Kee‐Hong Bae

York University

Jin Wang

Wilfrid Laurier University - Lazaridis School of Business & Economics

Date Written: December 2015

Abstract

A firm is in customer–supplier relationships when its business depends on a small number of major customers/suppliers. In this paper, we provide evidence that relationship‐specific investments undertaken by firms in customer–supplier relationships are associated with high cash holdings in these firms. The evidence is consistent with the prediction of Titman's stakeholder theory that a firm relying on relationship‐specific investments maintains a high cash reserve as a cushion to sustain its relationship‐specific investments when negative shocks occur. Our findings suggest that relationship‐specific investments are important determinants of the precautionary motive to hold cash.

Suggested Citation

Bae, Kee‐Hong and Wang, Jin, Why Do Firms in Customer–Supplier Relationships Hold More Cash? (December 2015). International Review of Finance, Vol. 15, Issue 4, pp. 489-520, 2015, Available at SSRN: https://ssrn.com/abstract=2716879 or http://dx.doi.org/10.1111/irfi.12058

Kee‐Hong Bae (Contact Author)

York University

4700 Keele Street
Toronto, M3J 1P3
Canada

Jin Wang

Wilfrid Laurier University - Lazaridis School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
Canada

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