Inalienable Customer Capital, Corporate Liquidity, and Stock Returns

Abstract

We develop a model in which customer capital depends on key talents' contribution and pure brand recognition. Customer capital guarantees stable demand but is fragile to financial constraints risk if retained mainly by talents, who tend to quit financially constrained firms, damaging customer capital. Using a proprietary, granular brand-perception survey, we construct a firm-level measure of the inalienability of customer capital (ICC) that captures the degree to which customer capital depends on talents. Firms with higher ICC have higher average returns, higher talent turnover, and more precautionary financial policies. The ICC-sorted long-short portfolio's spread comoves with financial constraints factor. CUSTOMER CAPITAL-CUSTOMERS' BRAND LOYALTY to a firm-is among a firm's most important intangible assets. In particular, customer capital helps stabilize the capacity of demand flows by creating entry barriers and durable advantages over competitors (e.g., Bronnenberg, Dubé, and Gentzkow (2012)).

Do Contented Customers Make Shareholders Wealthy? - Implications of Intangibles for Security Pricing

“…Eisfeldt and Papanikolaou (2013) also present empirical results which are consistent with the predictions of their model. They show that the stocks of firms with high levels of organizational capital earn higher returns, a finding that is supported by the evidence presented in Belo et al (2014) and Dou et al (2020). However, there is also conflicting evidence.…”

“…Dou et al (2020) characterize firms whose customer capital strongly depends on key talent as firms with high "inalienability of customer capital" (high ICC). Based on a theoretical model they argue that high ICC firms are vulnerable to financial distress and are therefore more risky.…”

Fundamental Analysis Via Machine Learning

“…ii) Other important individual income statement items (5). Specifically, we include advertising and R&D expenses, as they tend to generate long-term future benefits (e.g., Lev and Sougiannis, 1996;Dou, Ji, Reibstein, and Wu, 2021). We also include special and extraordinary items and discontinued operations, as firms may shift core expenses to these items to manipulate core earnings (e.g., Barnea, Ronen, and Sadan, 1976;McVay, 2006).…”

“…Earnings Bublitz and Ettredge, 1989;Sougiannis, 1994;Lev and Sougiannis, 1996;Chan, Lakonishok, and Sougiannis, 2001;Vitorino, 2014;Dou, Ji, Reibstein, and Wu, 2021); ii) firms may shift core expenses to special items (SPI), extraordinary items, and discontinued operations (XIDO) to manipulate/smooth core earnings (e.g., Barnea, Ronen, and Sadan, 1976;McVay, 2006;Barua, Lin, and Sbaraglia, 2010;Kaplan, Kenchington, and Wenzel, 2020); and iii) a common dividend (DVC) signals a firm's future earning power (e.g., Nissim and Ziv, 2001).…”

Optimizing Stock Market Returns during Global Pandemic Using Regression in the Context of Indian Stock Market

“…The impact of the COVID-19 pandemic on stock market returns has been and is being studied by scientists all over the world. For some noteworthy research in this vein, we refer to the works of (Al-Awadhi et al 2020Albulescu 2020;Dou et al 2021;Engelhardt et al 2020;Erdem 2020;Mazur et al 2020;Rahman et al 2021;Takahashi and Yamada 2020;Wilms et al 2021;Zaremba et al 2020;Zhang et al 2020).…”