The Effect of Customer-base Diversification on Idiosyncratic Volatility

The study sets out the objective to investigate how a firm’s customer-base diversification affects its stock return idiosyncratic volatility. The research paper primarily focuses on the way that the distribution of sales impacts the firm specific risk that is unrelated to the risk of the market, and it does so through the use of both a geographical and an operating customer-base concentration measure. The previous literature and the underlying theory mainly propose that there is a positive relationship between customer-base concentration and idiosyncratic volatility. The findings of this study appear to be in line with that hypothesis at a first glance; however, the results lack significance when controlling for other firm specific factors. Preliminary testing that excludes the control variables suggests both a positive and significant effect between customer-base concentration and idiosyncratic volatility. The significance of this effect is absorbed by the control variables when introduced to the models indicating that the cause of an increase in idiosyncratic volatility is in fact attributable to other firm characteristics than customer-base concentration. The study is conducted on Swedish companies and uses a panel data setting with 60 different companies over a period of 10 years ranging from 2006 to 2015