Customer Concentration and Corporate Violations

Customer concentration and corporate violations are two important research areas of corporate governance, but there are few studies that combine the customer concentration and corporate violations. The research in this paper finds that customer concentration has two effects on corporate violations: financial distress effects and governance effect. At the same time, through further analysis, it is found that the nature of property rights of enterprises will also have an impact on the relationship between the customer concentration and corporate violations.


Introduction
The healthy development of the capital market and the improvement of the real economy are inseparable from the standardized operation of listed companies. Board, 11 listed companies on the SME board, and 2 listed companies on the GEM. The existing literature shows that corporate violations are not only affected by the company's own governance structure, internal control, operating conditions and executive characteristics, but also affected by the external environment, especially by the external stakeholders. Therefore, the impact of external stakeholder characteristics on corporate violations is worth exploring.
As an important external stakeholder of the company, the relationship between customer and company has an important impact on the daily business activities of the company. There is a possibility that the customer and the enterprise may mutually promote a win-win effect, and there may be cases of exploitation of interest. Customer concentration is one of the hot topics in corporate customer research today; customer concentration refers to the ratio of the oper-F. Qian American Journal of Industrial and Business Management ating income of the top customers of the company to the total operating income of the company, the higher the ratio, the higher the concentration of customers in this company. The existing research divides the impact of customer concentration on enterprises into two categories: one is the financial distress effect, and the other is the governance effect. These two effects have two distinct effects on corporate behavior. However, at present, there is little research on the relationship between customer concentration and corporate violations. Therefore, the author starts with external stakeholders to explore the impact of customer concentration on corporate violations.

Research Purpose
The purpose of this paper is to explore the relationship between customer concentration and corporate violations, and to analyze the effect of customer concentration on corporate violations.
Starting from China's national conditions and unique institutional background, although China's state-owned system reform has made state-owned enterprises have more autonomy in their daily business activities, their ultimate control still belongs to the government, so the operation of state-owned enterprises will inevitably be subject to the government. Therefore, the nature of property rights will have an impact on the relationship between customer concentration and corporate violations. State-owned enterprises and private enterprises will have obvious differences in their daily production and operation decisions. Due to the influence of the government, state-owned enterprises need to play a leading role in the regulation of enterprises. The main goal of non-state-owned enterprises is to maximize their own value. The difference in customer concentration will have a different impact on corporate violations.
Based on this, this paper will also study whether there will be significant differences in the impact of customer concentration on corporate violations under different property rights.

Research Significance
The academic significance of this article lies in two aspects:  Enrich the iterature study of the economic consequences of customer con- The practical significance of this article lies in two aspects:  Reveal the influencing factors of corporate violations from the perspective of customer relations, which can provide certain guiding significance for the supervision work of the regulatory authorities and the formulation and improvement of relevant policies and regulations. When conducting supervision work, the regulatory authorities should consciously pay attention to the information of external stakeholders such as corporate customers to prevent violations of laws and regulations, protect the interests of investors and promote the healthy development of the capital market and the improvement of the real economy.  Help the regulatory authorities in the capital market to understand the role of corporate customer information disclosure, reaffirm the importance of improving the quality of information disclosure in the capital market, and provide some inspiration for the formulation of corporate external stakeholders' information disclosure policies.

Possible Innovations
 There are few studies in the existing literature that combine customer and corporate defaults. At present, most of the research on corporate violations at home and abroad is based on the influence of internal or external supervision, and the research in this paper is based on the external interests of enterprises. Research from the perspective of the relevant customers further expands the literature on the influencing factors of corporate violations and the economic consequences of customer concentration.  This paper studies the impact of customer concentration on corporate irregularities in light of China's unique national conditions and institutional background. At the same time, this paper also studies whether there is a significant difference in the degree of influence of customer concentration on corporate violations under different property rights and industry competition levels. What's more, this paper enriches the research of domestic related literatures from the perspective of customer concentration on the financial distress effect and governance effect of enterprises.

Literature Review
There are many foreign and domestic studies on the customer concentration and

Customer Concentration Literature
Foreign research on customer concentration has started earlier than in China, so foreign literature on customer concentration topics is more extensive. Based on a review of previous literature, customer concentration studies have generally focused on the economic consequences of customer concentration on corporate information disclosure, earnings management, company performance, and financial decisions. Considering the wide range of literature on customer concentration in the past, the article sorts out previous research on customer concentration related to this article.
As for the foreign related research, Porter (1979) included supplier bargaining power and customer bargaining power into the five-force model as two factors to analyze the company's competitiveness, and pointed out that the company's bargaining power is closely related to its profit rate [1]. In the 1980s, the concept of bargaining power is introduced to explore the scope of the supply chain; scholars have begun to pay attention to the bargaining power in the supply chain downstream company in the role of the game. Since the cost of obtaining raw materials will be directly affected by the supplier's bargaining power, and the selling price of the company's products will be directly affected by the bargaining power of the customers, the bargaining power of suppliers and customers will inevitably affect the overall performance of the company. Raman and Shahrur's (2008) study shows that in order to maintain a cooperative relationship with customers, companies can influence their customers' perceptions of their future through upward earnings management because poor financial conditions of a company can reduce its ability to perform implicit contracts, and customers generally do not choose to trade with companies that may have financial difficulties [2]. Crawford et al. (2016) explored the role of customer concentration in public disclosure. He found that large customers can obtain private information of enterprises at a lower cost and reduce their demand for public information [3]. Therefore, the concentration of customers is negatively correlated with the number of public disclosures of enterprises. When the company has strong reliance on major customers, that is, when the customer concentration is high, the company's asset-liability ratio increases, the cash flow risk increases, and the possibility of financial distress increases. Itzkowitz (2013) pointed out that the reason why companies hold more cash may be the additional operational risk caused by preventing the default of their major customers, and the importance of customers will increase their cash holdings. In addition, he also pointed out that the company's holding of additional cash may also be a guarantee signal to help reduce the risk of customer churnrate [4].
As for the domestic related research, Tang Yuejun (2009) believes that the higher the concentration of suppliers and customers, the stronger their bargain-F. Qian American Journal of Industrial and Business Management ing power, the worse the company's performance; the concentration between supplier concentration and bargaining power and company performance is one kind of inverted "U" shape relationship [5]. Zhang Min and Ma Lijun (2012) found that companies with higher customer concentration will provide more commercial credit to customers, thus making the company less valuable [6].
Zhang Sheng (2013) found that the higher the concentration of suppliers or customers, the worse the performance of the company due to the less holding of current assets and cash [7]. Lin Zhonggao, Tang Xieying (2015) analyzed the relationship between the company and major suppliers and customers from the perspective of specific investment, the results confirmed that the company's specific investment based on the cooperative relationship between the major suppliers and customers can promote the company's production efficiency; after analyzing the influencing factors of the company's diversified operation, it is further found that the higher the degree of diversification of the company, the relationship between the company and the customer is more dedicated to the company's production efficiency, at the same time, it will weaken the relationship between the company and the supplier [8].

Corporate Violation Literature
As for the foreign related research, Holderness (1988) found that many public companies in the United States are actually controlled by major shareholders behind the scenes [9]. Shleifer (1997) has done a detailed study on the ownership structure of the listed companies, pointing out that the company's business conflict based on principal-agent relationship has changed from the conflict between external investors and operators to the conflict between external investors and the controlling shareholder of the company, the reason is because the majority shareholders use the control of the company's operations to transfer resources from the listed company to themselves [10]. La Porta, Lopez and Shleifer (2000) use "tunneling" when describing the phenomenon that large shareholders transfer company resources from the company to their own hands, "Tunneling of the Controlling Shareholders" origins from this point, and its specific performance is excessively high managers' compensation, loan guarantees, and diluted equity [11]. Fan and T. J. Wong (2002) found the controlling shareholder of a listed company often manipulates the information to "smear" small and medium-sized shareholders, and its reliability of manipulating information disclosure is greatly reduced [12]. Sharma (2004) studied the financial fraud of institutional investors and companies in enterprises, and research shows that higher institutional shareholdings help companies reduce financial fraud [13]. An effective and common way to encourage executives is management shareholdings. Researchers believe that this kind of compensation incentive model is conducive to bundling the interests of managers and the interests of the company, and narrowing the differences of interests between principals and agents in the principal-agent theory.

F. Qian American Journal of Industrial and Business Management
As for the domestic related research, China Securities Regulatory Commission has strict standards for companies to be listed, and listing has become a resource that many companies yearn for. Wu Liansheng and Wang Yaping (2007) found that China's listed companies in order to avoid government regulation, China's listed companies are exempted from delisting or processing, and have higher surplus in avoiding losses [14]. At the same time, the higher the degree of trust between people in the company's location, the weaker the influence of the CEO's influence on the board on the company's tendency to violate the company [17]. Teng Fei et al. (2016) found that product market competition has an "inducing" effect on corporate violations, that is, the higher the degree of competition in the product market of the company, the higher the company's tendency to violate the rules, the "induction" effect of product market competition on company violations is more obvious in business violations [18]. Cao Chunfang et al. (2017) found that the improvement of judicial independence not only increased the probability of the company being investigated for violations, but also increased the negative reaction of the company's violation of the regulations [19]. Zhai Dong et al. (2017) found that companies that hire government-invested independent directors have a higher tendency to violate the rules, and the probability of violations being audited is lower; companies that hire university-dealer-type independent directors have a lower tendency to violate regulations, and the probability of violations being audited is not lower [20]. prove the coordination of the supply chain, thereby reducing the information asymmetry between customers and suppliers. Secondly, in the long-term cooperative relationship, the company can also obtain more accurate customer information, which can make more accurate production forecasting, reduce inventory management costs, and improve inventory management efficiency and working capital management efficiency. At the same time, because either the suppliers or the customers are bankrupt and liquidated, the other party has to bear the corresponding costs. If the supplier goes bankrupt, its impact on the big customers is also fatal. The customer will actively participate in the company management for his own interests, actively pay attention to the company's operating status and financial status, and play an external supervision role for the company, thus to a certain extent relieve agency conflicts within the enterprise.

Literature Summary
Therefore, from the perspective of governance effects, customer concentration will increase the likelihood of corporate violations.

Property Rights, Customer Concentration and Corporate Violations
From the transition of the socialist planned economy to the socialist market economy, China has produced township enterprises, individual and private enterprises, and foreign-funded enterprises. According to the scientific division method, they should be collectively referred to as the non-state-owned economy. From the perspective of the owner, companies can be divided into state-owned enterprises and non-state-owned enterprises. Non-state-owned enterprises include private enterprises, foreign companies, and joint ventures. In the context of China's national conditions and special systems, although China has gradually implemented state-owned reforms, state-owned enterprises have more self-management rights, but the natural relationship between state-owned enterprises and the government makes their business objectives still not only include the financial business performance but also cooperating with the government to undertake more social and political tasks due to government control, because the government controls their equity, personnel rights and other important powers. On the other hand, state-owned enterprises are not simply market entities that aim at maximizing value or maximizing profits, but have multiple objectives, one of the most important ones is to bear a certain policy burden for the government and maintain social stability. These characteristics of state-owned enterprises determine that their corporate violations will be more constrained. Therefore, the impact of customer concentration on corporate violations may vary under different property rights. On the one hand, the nature of property rights will have a deterrent effect on the impact of customer concentration on corporate violations. First, due to the relationship between state-owned enterprises and the government, customers generally tend to cooperate with state-owned enterprises with lower risks and more secure operations. Second, because state-owned enterprises need to cooperate with the government to undertake more social and political tasks, they are F. Qian subject to more restrictions on corporate compliance operations. Finally, due to the special relationship between state-owned enterprises and the government, they will be subject to more social media supervision and will also pay more attention to their social image. Therefore, in terms of corporate compliance, they will comply with regulations to conduct business operations.
On the other hand, non-state-owned enterprises, because their enterprise strength is generally weaker than state-owned enterprises and their main business goal is to maximize corporate value, non-state-owned enterprises are more likely to fall into financial difficulties due to large customers, and corporate irregularities such as whitewashing profits, financial fraud, and disclosure of false information occur. Therefore, the nature of property rights will have a restraining effect on the impact of corporate customer concentration on corporate violations.
Whether it is a state-owned enterprise or a non-state-owned enterprise, the customer is an important external stakeholder for them, and both will be supervised by the client. However, for state-owned enterprises, because they pay more attention to their public image, the impact of corporate violations will be greater, and the governance effect of customers on state-owned enterprises should be stronger. Therefore, the nature of property rights will have a promoting effect on the suppression of corporate customer concentration on corporate violations.

Research Conclusions and Limitations
Through the literature review of this paper, we can conclude that domestic and foreign research still lacks research on customer concentration and corporate violations, and future research can be further studied in this area. After the analysis of this paper, customer concentration has two effects on corporate violations: financial distress effect and governance effect, but which effect is more influential, and which will be a direction for future research still need to be discussed. At the same time, through further discussion and analysis in this paper, the paper concludes that whether it is the financial distress effect or the governance effect, the nature of the property rights of the enterprise will have a significant impact on the relationship between customer concentration and corporate violations.
However, there are still some limitations in this paper, and further research is needed in the future. For example, customer concentration can have an impact on corporate violations; then what factors affect customer compliance by the degree of customer concentration? This is an issue that can be explored in the future. At the same time, in future research, the empirical data of listed companies can also be used to test the viewpoints of this article.

Conflicts of Interest
The author declares no conflicts of interest regarding the publication of this paper.