Customer Relationship and Debt Contracting

This paper examines the effect of a firm's customer base concentration on its loan contract terms and how the effect varies with the strength of its customer relationship. We predict that firms with more concentrated customer bases obtain less favorable loan contract terms due to the increased operating risk associated with a concentrated customer base, and that this effect is mitigated by strong customer relationship. Our empirical evidence is consistent with these predictions. We find that firms with more concentrated customer bases have higher loan spread and shorter loan maturity and are more likely to issue secured loans. These effects, however, become insignificant or even reverse when the supplier firm has a strong relationship with its customers.