The standard measures of distress risk ignore the fact that firm defaults are correlated and that some defaults are more likely to occur in bad times. We use risk premium computed from corporate credit spreads to measure a firm’s exposure to systematic variation in default risk. Unlike previously used measures, the credit risk premium explicitly accounts for the non-diversifiable component of distress risk. In contrast to prior findings in the literature, we find that stocks with higher systematic default risk exposures have higher expected equity returns which are largely explained by the Fama–French risk factors. We confirm the robustness of these results by using an alternative systematic default risk factor for firms that do not have bonds outstanding.

Using a recently expanded dataset on supplier-customer links, we introduce a dynamic relationship life-cycle hypothesis. We hypothesize that the relation between customer-base concentration and profitability is significantly negative in the early years of the relationship, but becomes positive as the relationship matures. The key driver of this dynamic is the customer-specific investments that the relationship entails. These investments result in larger fixed costs, greater operating leverage, and a higher probability of losses early in the relationship, but can significantly benefit the firm as the relationship matures. Although many of these money-losing firms in early-stage relationships were not studied in Patatoukas (2012), we find a market reaction to increases in customer concentration similar to that in his paper. This result provides powerful confirmatory evidence of the value of customer concentration. We document one of the intangible benefits of customer concentration, technology sharing, and show how this benefit increases as the relationship matures.