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Government customers, institutional investment horizons, and liquidity risk

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Abstract

Contributing to the literature on government suppliers’ market risk and liquidity, we document a negative association between the government customer concentration and suppliers’ stock liquidity risk. Our further analysis implies that the gathering of long-horizon institutional investors is an important channel through which government customers help to lower the suppliers’ stock liquidity risk. Long-horizon institutional investors prefer firms with safety net characteristics and transparent information environment. The procurement of government customers creates low-risk, long-term, cost-plus pricing contracts that enable suppliers to achieve stable growth and better performance. Government scrutiny also helps suppliers to attenuate information asymmetry. We also find that the negative association between the government customer concentration and suppliers’ stock liquidity risk is stronger during the financial crisis period. This implies that government customers lead to greater stock liquidity for suppliers during economic times when it is most valuable.

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Notes

  1. The original measure of Amihud (2002) does not use the square root. Gopalan et al. (2012) recommend the square root version because the original Amihud measure is highly skewed. Our results do not change qualitatively if the original Amihud measure is employed.

  2. Per Lou and Sadka (2011), “During the financial crisis of 2008–2009, stocks with high liquidity betas underperformed.”.

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Correspondence to Brian Boscaljon.

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Appendix: Government supplier industry distribution

Appendix: Government supplier industry distribution

In this appendix (Table 13), we report the sample distribution of government supplier observations across industries.

Table 13 Sample industry distribution

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Boscaljon, B., Feng, H., Jia, Y. et al. Government customers, institutional investment horizons, and liquidity risk. Rev Quant Finan Acc 56, 273–296 (2021). https://doi.org/10.1007/s11156-020-00894-w

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