Customer concentration, institutions, and corporate bond contracts

We examine the effect of customer concentration, the quality of institutions, and their interaction on corporate bond contract terms in China. We find that higher customer concentration is associated with higher bond spreads, shorter bond maturity, and more bond covenants. In contrast, better institutions are associated with lower bond spreads, longer bond maturity, and fewer bond covenants. Moreover, we find that the adverse or unfavourable association between customer concentration and bond contract terms is weakened for firms operating within better institutions or for firms whose ultimate owners are the Central Government of China. Furthermore, the adverse association between customer concentration and bond contract terms is more pronounced when a supplier's major customers have lower switching costs or when the supplier has made more relationship-specific investments. Finally, our main results are robust to controls for endogeneity concerns and other sensitivity checks. Overall, our findings suggest that bondholders view customer concentration as a risk factor but better institutions as a protection.