Stock Returns on Customer Satisfaction Do Beat the Market: Gauging the Effect of a Marketing Intangible

Abstract

A debate about whether firms with superior customer satisfaction earn superior stock returns has been persistent in the literature. Using 15 years of audited returns, the authors find convincing empirical evidence that stock returns on customer satisfaction do beat the market. The recorded cumulative returns were 518% over the years studied (2000–2014), compared with a 31% increase for the S&P 500. Similar results using back-tested instead of real returns were found in the United Kingdom. The effect of customer satisfaction on stock price is, at least in part, channeled through earnings surprises. Consistent with theory, customer satisfaction has an effect on earnings themselves. In addition, the authors examine the effect of stock returns from earnings on stock returns from customer satisfaction. If earnings returns are included among the risk factors in the asset pricing model, the earnings variable partially mitigates the returns on customer satisfaction. Because of the long time series, it is also possible to examine time periods when customer satisfaction returns were below market. The reversal of the general trend largely resulted from short-term market idiosyncrasies with little or no support from fundamentals. Such irregularities have been infrequent and eventually self-correcting. The authors provide reasons why irregularities may occur from time to time.

Do managers know what their customers think and why?

“…This is an important question since customer satisfaction, for example, has been shown to drive bottom-line performance of the firm (e.g., Fornell, Morgeson, and Hult 2016). But, in reality, it is not clear that firms' managers really know what their customers think of the firm's product/service offerings and why.…”

“…Additionally, a large and growing literature supports the significant firm performance benefits of successfully delivering such superior customer satisfaction (e.g., Akzoy et al 2008;Fornell, Mithas, Morgeson, and Krishnan 2006;Fornell, Morgeson, and Hult 2016). In their efforts to achieve these benefits, most large firms monitor the satisfaction of their customers with the firm's product/service offerings (e.g., Morgan, Anderson, and Mittal 2005) and use consumer survey (and other) data, combined with increasingly sophisticated analytical techniques to help uncover the drivers of customers' satisfaction and loyalty.…”

Customer Attitude from Social Media, Customer Satisfaction Index, and Firm Value

“…Customer satisfaction is one of the most important intangible assets of a firm that affects its market value (Fornell et al 2016). Prior research suggests that high customer satisfaction leads to greater return on investment and cash flows (Aksoy et al 2008;Anderson et al 2004;Fornell et al 2006;Gruca and Rego 2005;Tuli and Bharadwaj 2009) as satisfied customers are more likely to be loyal, thereby protecting market share, lowering price elasticity as well as selling/marketing costs (Anderson et al 1994).…”

“…To the extent that the potential investors believe that customer satisfaction would have positive impacts on future cash flows of a firm, they will seek information about the customer satisfaction of the firms and use it to make their investment decisions. In fact, research has shown that customer satisfaction does matter to investors who take satisfaction information into account while making their investment decisions (Anderson and Mansi 2009;Fornell et al 2016;Luo et al 2014). While it is difficult and costly to reliably assess the customer satisfaction for a large number of firms on a regular basis, investors may rely on American Customer Satisfaction Index (ACSI), which is the leading measure of customer satisfaction in the U.S., to obtain information about relative customer satisfaction of the largest 300 companies in the U.S. consumer market (Fornell et al 2006).…”

“…It has been shown that the information about customer satisfaction as released through ACSI does influence stock returns, thereby suggesting that investors utilize information contained in ACSI to determine the value of stock. Specifically, it was found that higher ACSI leads to abnormal stock returns of approximately 10% per annum (Fornell et al 2016). To leverage these insights, recently an exchange-traded fund has been created that uses ACSI to target companies with high customer satisfaction as a way to build stock portfolios that deliver long-term investment growth.…”