The Profitability and Pricing of Major Customers

We examine the profitability and valuation of retail firms identified by suppliers as major customers, using major customer relationships to proxy for unrecorded organizational-capital intangibles. Major customers have higher operating profitability and profitability persistence, with the sources of the higher profitability consistent with purported advantages of supply chain arrangements. The pricing of major customers is consistent with the market recognizing the level and over-time properties of operating profitability. Together, these results suggest that investors understand the profitability effects of unrecorded organizational intangible assets and that financial statement analysis can be used to further examine the valuation effects of such intangibles.

[1]  Trish Kelly,et al.  Increased Buyer Concentration and Its Effects on Profitability in the Manufacturing Sector , 2000 .

[2]  Robin Cooper,et al.  Strategic cost management - Supply chain management for lean enterprises : Interorganizational cost management , 1999 .

[3]  James A. Ohlson.  Earnings, Book Values, and Dividends in Equity Valuation* , 1995 .

[4]  E. Fama,et al.  Common risk factors in the returns on stocks and bonds , 1993 .

[5]  Paul Zarowin,et al.  The boundaries of financial reporting and how to extend them , 1999 .

[6]  S. Penman.  The articulation of price-earnings ratios and market-to-book ratios and the evaluation of growth , 1996 .

[7]  Wayne S. Upton.  Business and financial reporting, challenges from the new economy , 2001 .

[8]  Stephen H. Penman,et al.  Ratio Analysis and Equity Valuation: From Research to Practice , 2001 .

[9]  B. Lev.  Intangibles: Management, Measurement, and Reporting , 2001 .

[10]  John Kwoka.  The Effect of Market Share Distribution on Industry Performance: Reply , 1979 .

[11]  B. Lev,et al.  The capitalization, amortization, and value-relevance of R&D , 1996 .

[12]  E. Fama,et al.  Forecasting Profitability and Earnings , 1999 .

[13]  Michael R. Kinney,et al.  Further Evidence on the Extent and Origins of JIT's Profitability Effects , 2002 .

[14]  James E. Henderson,et al.  Power and Firm Profitability in Supply Chains: French Manufacturing Industry in 1993 , 1998 .

[15]  E. Brynjolfsson,et al.  The Intangible Costs and Benefits of Computer Investments: Evidence from the Financial Markets , 2001 .

[16]  Craig S. Galbraith,et al.  Firm profitability and relative firm power , 1983 .

[17]  Xiao-Jun Zhang,et al.  Accounting Conservatism, the Quality of Earnings, and Stock Returns , 1999 .

[18]  Steven Lustgarten,et al.  The Impact of Buyer Concentration in Manufacturing Industries , 1975 .

[19]  William H. Borghesani,et al.  Controlling the chain: buyer power, distributive control, and new dynamics in retailing , 1997 .

[20]  Financial Statement Analysis of Leverage and How it Informs About Profitability and Price-to-Book Ratios , 2001 .

[21]  George J. Stigler,et al.  Capital and Rates of Return in Manufacturing Industries. , 1964 .

[22]  D. Ravenscraft.  Structure-Profit Relationships at the Line of Business and Industry Level , 1983 .

[23]  R. M. Bowen,et al.  Economic and Industry Determinants of Accounting Method Choice , 1999 .