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Executive Summary
Firm valuation has been an important domain of interest for finance. However, researchers and managers have constantly questioned professional analysts’ ability to predict the financial performance of firms effectively. Marketers have recently proposed that much of the problem with predicting firm performance is that the models that analysts use lack intangible and nonfinancial customer-based metrics. Most financial models do not include customer-related metrics in this process. Studies in marketing have found that one particular customer metric, customer satisfaction, improves the ability to predict future cash flows, long-term financial measures, stock performance, and shareholder value. However, most of these studies predominantly employ models that are not directly used in finance practice. This article extends existing literature by examining the impact of customer satisfaction on firm valuation by employing multiples and risk-adjusted abnormal return models borrowed directly from the practice of finance, such as the capital asset pricing model, the Fama–French three-factor model, and the Carhart four-factor model. Data include 3600 firm-quarter observations from the American Customer Satisfaction Index, COMPUSTAT, and the Center for Research in Securities Prices databases from 1996 to 2006. The results indicate that purchasing a portfolio of stocks consisting of firms with high levels and positive changes in customer satisfaction will outperform the other three possible portfolio combinations (low levels and negative changes, low levels and positive changes, and high levels and negative changes in customer satisfaction) along with the Standard & Poor 500. Initially, the stock market undervalues positive satisfaction information, but it adjusts in the long run. The authors also rigorously test for multiple start–end dates (referred to in the investment industry as “backtesting”) to ensure that the findings are not based on fortuitous market timing. These results have important implications for research analysts and portfolio managers alike. Customer satisfaction is found to have an important influence on firm value and thus can be used actively in portfolio strategies to generate superior returns. Forming portfolios on the basis of satisfaction data, especially when it is publicly available, has the potential to generate valuable excess returns. Frequently, marketing is criticized for its inability to quantify its added value to business. Because of the more intangible nature of marketing and difficulty in terms of quantifying its impact, expenditures on improving the customers’ experience are sometimes viewed as unnecessary or even useless. However, this research clearly demonstrates the superior returns to shareholders that investments in customer satisfaction can provide.

Biography
Lerzan Aksoy is Associate Professor of Marketing at Fordham University. She is coauthor of the book Loyalty Myths (John Wiley & Sons, 2005), a 2007 finalist for the Berry–AMA Book Prize. Lerzan was awarded the “TOYP—Ten Outstanding Young Person” award in Turkey for Scientific Leadership by Junior Chamber International. She has received best-paper awards from Journal of Marketing and Managing Service Quality and the Citations of Excellence Top 50 award (top 50 management papers, out of approximately 20,000 papers reviewed) from Emerald Management Reviews. In addition, she was awarded finalist for best paper from Journal of Service Research. Her articles have been accepted for publication in Journal of Marketing, Marketing Science, MIT Sloan Management Review, Journal of Service Research, Managing Service Quality, and International Journal of Service Industry Management, among other outlets

Bruce Cooil is Dean Samuel B. and Evelyn R. Richmond Professor of Management in the Owen Graduate School of Management at Vanderbilt University. His research interests include the adaptation of grade-of-membership and latent class models for marketing and medical research, reliability estimators for discrete and continuous data, large-sample estimation theory, and extreme value theory. He has also written and consulted on models for patient care, mortality, medical malpractice, and automobile insurance claims and indemnities. His publications have appeared in business, statistics, and medical journals, including Journal of Marketing Research, Journal of Marketing, Psychometrika, Journal of the American Statistical Association, Annals of Probability, Circulation, and New England Journal of Medicine. Bruce received his PhD in Statistics from the Wharton School, University of Pennsylvania, and Master (Statistics) and Bachelor (Mathematics) of Science degrees from Stanford University.

Christopher Groening is Assistant Professor of Marketing at University of Missouri–Columbia.

Timothy L. Keiningham is Global Chief Strategy Officer and Executive Vice President at Ipsos Loyalty. He is the author of several management books and numerous scientific papers. His most recent book, Loyalty Myths (John Wiley & Sons, 2005) was a 2007 finalist for the Berry–AMA Book Prize. He has received best-paper awards from Journal of Marketing (twice), Journal of Service Research, and Managing Service Quality and the Citations of Excellence “Top 50” award (top 50 management papers, out of approximately 20,000 papers reviewed) from Emerald Management Reviews. His articles have been accepted for publication in such journals as Journal of Marketing, Journal of Service Research, Managing Service Quality, International Journal of Service Industry Management, Marketing Science, and MIT Sloan Management Review.

Atakan Yalçın is on the faculty of Graduate School of Business at Koç University. He previously held visiting positions at Brandeis University and Boston College. Dr. Yalçın received his MBA from Cox School of Business at Southern Methodist University in 1996 and his PhD from Carroll School of Management at Boston College in 2002. Dr. Yalçın has taught courses in Investment Management, Derivatives Securities, and Financial Management. His research interest is in empirical asset pricing and empirical aspects of financial economics. His work has been published in Quarterly Review of Economics and Finance, Journal of Banking and Finance, and Journal of Marketing, among other outlets Dr. Yalçın is a member of the American Finance Association, Western Finance Association, Financial Management Association, and the CFA Institute.

Journal of Marketing, Vol. 72, No. 4, July 2008
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