Customer satisfaction, stock price informativeness, and corporate investment

Abstract

How marketing metrics affect firms' financial performance has been a hot topic to both market participants and scholars. Customer satisfaction is among the most insensitively investigated marketing metrics, and it is documented to affect firms' financial performances including firm valuations, future cash flows, stock prices and returns, cost of capital, analyst forecasts, and management compensation plans. In this study, I contribute to this line of literature by investigating the following two issues: 1) the association between customer satisfaction and stock price informativeness; and 2) the association between customer satisfaction, corporate investment, and investment valuation (investment puzzle). For the association between customer satisfaction and stock price informativeness, I argue that since higher customer satisfaction will lead to higher, stable future cash flows, investors in stock market will hold similar beliefs about the future fundamentals, and thus lower the percentage of noise trading. As a result, higher customer satisfaction will increase stock price informativeness. Using a series of stock price informativeness measures, I find robust empirical evidence to support our predictions. I also find that the association is more pronounced when insider/institutional trading intensity is higher. Meanwhile, the association is more pronounced when industry competition is high. This association is also more pronounced when investor/customer sentiment is high. Literature shows that firms with higher customer satisfaction have larger investment opportunity sets and lower financial constraints. So for the second issue, I expect higher customer satisfaction will lead to higher corporate investment levels. Empirical evidence supports this expectation. After that, I examine how customer satisfaction affects investment valuation. First I show that investment puzzle (the negative correlation between investment and subsequent performances, well documented by literature) is pervasive in my sample. One possible reason for this investment puzzle is due to agency problem. Meanwhile, I expect higher customer satisfaction could help mitigate agency problem for the following two reasons: firstly, according to the stakeholder theory of corporate governance, customer is one important kind of stakeholders and may have monitoring effect; and secondly, customer satisfaction is positively related to the stock price informativeness and informativeness is believed to be one kind of effective corporate governance mechanisms. Empirically I show that firms with higher customer satisfaction will have less investment puzzle. Finally, I do additional tests to show that customer satisfaction and demanding board structure may be substitutes to each other in terms of mitigating investment puzzle.