Major Customers and the Speed of Leverage Adjustments

Purpose: This study investigates how major customers influence the speed of adjustment (SOA) in a firm's capital structure, specifically examining the effects of governmental versus non-governmental major customers.Study design/methodology/approach: The study employs Blundell and Bond’s (1998) GMM model to estimate SOA. Robustness methods include fixed effects, two-stage least squares (2SLS), propensity score matching (PSM), and the augmented doubly censored Tobit (DPF estimator).Sample and data: The sample consists of 186,240 firm-year observations from Compustat North America annual files and Compustat historical segment files, spanning 1978 to 2013. Firms in the utility and financial sectors are excluded.Results: Findings indicate that major customers significantly influence SOA by reducing market uncertainty through certifications. Firms with major customers have a higher SOA, with governmental customers exhibiting an even higher SOA than non-governmental ones. Results are consistent across various models and settings.Originality/value: This study uniquely identifies major customers as critical determinants of SOA, highlighting the heterogeneities in firms' SOA. It stresses the importance of considering customer type in financial strategies, differentiating between governmental and non-governmental impacts. These findings offer valuable insights for scholars, policymakers, and practitioners.Research limitations/implications: Focusing on publicly listed U.S. firms limits generalization. Future research should extend the analysis to other regions and recent periods. The findings provide insights for supplier firms in strategizing financial decisions and managing relationships with major customers. We emphasize the significant role of major customers in financial strategies, advocating for more detailed disclosure policies in the U.S. and globally to enhance transparency and market efficiency.