Concentrated customers: A blessing or a curse for tunneling prevention?

Abstract

Using a sample of Chinese listed firms, this paper investigates the impact of customer concentration on controlling shareholders’ tunneling. Our findings reveal that firms with concentrated customer bases engage in high levels of tunneling activities. Further analysis indicates that customer concentration increases firms’ excess cash holdings and information opacity, thereby facilitating tunneling. This effect is more pronounced in firms with limited market power, firms operating in durable goods industries, firms located in cities with weak legal environments, and firms with less exposure to Confucian culture. Additionally, we observe that the heightened tunneling accompanied by customer concentration leads to abnormal executive compensation, exacerbated financial distress, and ultimately, a reduction in firm value. Overall, our study suggests that, contrary to serving as a monitoring force, concentrated customers actually facilitate controlling shareholders’ tunneling practices.