Supply chain risk and precautionary liquidity: How customer concentration shapes corporate cash holdings in China

This paper investigates how customer concentration shapes corporate cash holdings using Chinese manufacturing firms from 2007-2020. We find that higher customer concentration significantly increases cash holdings, supporting the risk amplification hypothesis rooted in precautionary savings. Heterogeneity analyses reveal that this effect is stronger when major customers are stable and when boards are larger, yet weaker with greater relationship-specific investments. Mechanism tests identify three key channels: major customer quality, inventory turnover dynamics, and cash flow volatility. These findings demonstrate that customer concentration operates through supply chain partner characteristics that impose liquidity pressures, operational efficiency gains that necessitate financial buffers, and heightened cash flow uncertainty, highlighting supply-chain dependence as a critical driver of liquidity management in emerging markets. • Customer concentration significantly increases corporate cash holdings in Chinese manufacturing firms, consistent with the risk amplification effect under precautionary savings theory. • The positive cash response is stronger when major customer relationships are stable and boards are larger. • The positive cash response is attenuated when firms undertake greater relationship-specific investments, indicating a substitution between operational lock-in (specialized assets) and financial flexibility (cash buffers) in managing supply-chain risk. • Customer concentration operates through multiple channels: major customer quality, inventory turnover efficiency risk trade-offs, and cash flow volatility.