Customer satisfaction, earnings and firm value

Customer satisfaction, earningsand firm value

Don O’SullivanMelbourne Business School, University of Melbourne, Melbourne,

Australia, and

John McCalligMichael Smurfit School of Business, University College Dublin, Dublin, Ireland

Abstract

Purpose – The aim of this study is to examine the relationship between customer satisfaction,earnings and firm value.

Design/methodology/approach – A model borrowed from the accounting literature – the Ohlsonmodel – is used to consider the impact of customer satisfaction on Tobin’s q – a capital market-basedmeasure of firm performance widely used in marketing research. Data on firm performance is drawnfrom COMPUSTAT and integrated with data on customer satisfaction from the American CustomerSatisfaction Index (ACSI).

Findings – Results show that customer satisfaction has a positive impact on firm value. Critically,the authors find that this impact is over and above the impact that earnings has on firm value. Theyalso find that customer satisfaction positively and significantly moderates the earnings-firm valuerelationship.

Research limitations/implications – Findings are limited to firms covered by the AmericanCustomer Satisfaction Index and subject to the assumptions underpinning the Ohlson model.

Practical implications – This study’s demonstration of the complementary relationship betweenearnings and customer satisfaction in determining firm value should encourage managers to engagewith satisfaction as a driver of business performance and value.

Originality/value – Findings extend recent studies on the impact of customer satisfaction onbusiness performance. While prior studies either ignore earnings or focus on the relationship betweensatisfaction and stock returns, the authors show the impact of satisfaction on firm value, in a modelthat includes earnings. Importantly, they also extend prior studies by showing that the interactionbetween customer satisfaction and earnings is central to understanding the impact of both satisfactionand earnings on firm value. In addition, they demonstrate the usefulness of an earnings-basedvaluation model, to explore the relationship between a marketing metric and firm value. The authors’approach may be adopted to consider the impact of other measures of marketing performance. Thus,they hope that this study helps to further bridge the gap between marketing and the financialdisciplines.

Keywords Customer satisfaction, Earnings, Firm value

Paper type Research paper

1. IntroductionAn inability to engage with senior management through common metrics has limitedthe influence of marketing as a discipline (Ambler, 2003; Anderson, 1982; Day and

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/0309-0566.htm

The authors thank the Intellectual Property Research Institute of Australia who providedfinancial support for their research.

Satisfaction,earnings and

firm value

827

Received 3 August 2009Revised 10 December 2009

16 December 200915 March 2010

Accepted 9 May 2010

European Journal of MarketingVol. 46 No. 6, 2012

pp. 827-843q Emerald Group Publishing Limited

0309-0566DOI 10.1108/03090561211214627

Fahey, 1988; Srivastava et al., 1998). Latterly, in an attempt to gain “a seat at the table”(Webster et al., 2005, p. 39), marketers and marketing researchers have begun to shiftaway from focusing on the relationship between marketing and traditionalproduct/market and accounting-based measures, to develop a clearer link with firmvalue (Lehmann, 2004; Rust et al., 2004). This shift in emphasis, firstly reflects the viewthat traditional accounting measures do a poor job of capturing marketing’scontribution (Lukas et al., 2005; Srivastava and Reibstein, 2005). For example, theaccounting practice of expensing all elements of marketing expenditure withoutrecognition of an investment component is a commonly noted concern for marketers(Mizik and Jacobson, 2007). Also, accounting practices are such that key marketingassets, such as customer satisfaction and brand equity, are commonly omitted fromfinancial statements.

A second motivation for the shift in research focus towards the relationship betweenmarketing and firm value is a recognition that maximizing shareholder returns is theprimary responsibility of senior executives (Day and Fahey, 1988). Thus, a clearer linkto shareholder value needed to be established (Srivastava et al., 1998). There is now asubstantial body of research examining the relationship between marketing activitiesand assets and firm value (Srinivasan and Hanssens, 2009). The impact of this researchis such, that Luo and Donthu (2006) describe modern marketing theory as being moreconcerned with forward looking measures of shareholder value than backward lookingmeasures of profitability.

While studies of marketing’s contribution to capital market-based measuresconstitute an important evolution in the marketing literature, senior executivescontinue to focus on accounting measures and on earnings in particular (Barth et al.,1999; Bowen et al., 1995). In a survey of over 400 senior financial executives, examiningattitudes to a range of financial performance measures, including both earnings andcash flow, Graham et al. (2005) conclude that there is an overwhelming emphasis ofreported earnings. This observation is consistent with earlier studies that point toearnings being high on the agenda of senior management when they assess the returnsachieved on strategic initiatives (e.g. Copeland et al., 1996). Rappaport (2005) describesthe level of managerial and analyst attention to earnings as a key performance measureas an “obsession”. Thus, if marketing is to fully engage with senior executives, studiesneed to include a consideration of earnings in an assessment of marketing’scontribution to firm value (Rust et al., 2002; Mizik and Jacobson, 2007).

Here, we consider the relationship between one measure of marketing performance– customer satisfaction, earnings and firm value. In doing so, we aim to provide amanagerially relevant examination of customer satisfaction’s contribution to firmvalue. We begin by specifying an earnings-based model of firm value. Next, weconsider whether the inclusion of customer satisfaction, as measured by the AmericanCustomer Satisfaction Index (ACSI), increases our ability to explain firm value. That is,whether customer satisfaction has an impact on firm value that is over and above theimpact of earnings. We use Tobin’s q (the ratio of market value to the replacement costof the firm’s assets) as our measure of firm value[1]. Tobin’s q is commonly used instudies linking marketing to firm value (Srinivasan and Hanssens, 2009), andexpresses the market value of the firm as a ratio of the replacement costs of the firm’sassets.

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Our research builds on recent studies pointing to the impact of customer satisfactionon future revenue streams (Gruca and Rego, 2005) and earnings expectations(O’Sullivan and McCallig, 2009). We extend these studies by demonstrating that,controlling for the influence of earnings, customer satisfaction has a positive impact onfirm value. We also show that satisfaction moderates the impact of earnings on firmvalue. In doing show we provide a clear motivation for senior management to engagewith customer satisfaction as a critical measure of firm performance.

The remainder of this paper is organized as follows. To begin, we provide anoverview of the relationship between earnings customer satisfaction and firm value.Next, we specify an earnings-based valuation model. We then describe the data andpresent our analysis. We conclude with a discussion of the findings from our study,implications and directions for future research.

2. Customer satisfaction and firm valueThe impact of marketing on firm value has been studied extensively (e.g. Aaker andJacobson, 1994; Aaker and Jacobson, 2001; Srivastava et al., 2001; Anderson et al., 2004;Aspara et al., 2009). Researchers have examined the financial impact of productmarketing strategies (Singh et al., 2005), brand strategies (Rao et al., 2004), strategicresponses to new technologies (Lee and Grewal, 2004), advertising expenditures(Graham and Frankenberger, 2000), advertising agency terminations (Hozier andSchatzberg, 2000), and new product introductions and sales promotions (Pauwels et al.,2004; Srinivasan et al., 2006). The relationship between firm value and marketingassets has been considered with reference to marketing resources (Hooley et al., 2005;Luo, 2005), perceived quality (Balasubramanian et al., 2005), and brand equity (Aakerand Jacobson, 2001; Madden et al., 2006). Within this research stream, customersatisfaction has received particular attention (e.g. Anderson et al., 2004; Gruca andRego, 2005; Fornell et al., 2006; Sorescu et al., 2007; O’Sullivan et al., 2009).

An large body of research points to the financial performance benefits of customersatisfaction. A central theme of this research, is that satisfaction is an antecedent ofcustomer retention/loyalty (Reichheld and Teal, 1996; Bolton and Drew, 1991; Rust andZaborik, 1993; Szymanski and Henard, 2001). Other related benefits of customersatisfaction include increased transactions (Bolton and Lemon, 1999) and willingnessto purchase additional services (Anderson et al., 1997; Zeithaml et al., 1996), as well asreduced price elasticity (Garvin, 1988; Anderson, 1996) and transaction costs(Anderson et al., 1994).

Studies of the relationship between customer satisfaction and firm value havetended to draw on ACSI data (Anderson et al., 2004; Gruca and Rego, 2005; Ittner andLarcker, 1998; Fornell et al., 2006). These studies commonly report a positiverelationship between customer satisfaction and the firm value (Ittner and Larcker,1998; Fornell et al., 2006). Anderson et al. (2004), for example, use techniques commonlyemployed in finance to test the relationship between customer satisfaction and firmvalue. Again using ACSI data, Gruca and Rego (2005) strengthen the relationshipbetween customer satisfaction and firm value. They identify a positive link betweensatisfaction and the growth and stability of future cash flows, two aspects of cash flowrecognised as having a direct effect on firm value (Srivastava et al., 1998)[2]. Thesestudies are a welcome evolution of the customer satisfaction literature. Lehmann (2004)has described this research stream as marking the completion of the satisfaction


firm value

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literature, which has moved from measurement per se to financial impact. However,while customer satisfaction may enhance future revenue streams it is uncertainwhether the impact of satisfaction on firm value is captured in discounted cash flowmodels. More broadly, it is unclear that the value enhancing aspects of marketingcompetencies (e.g. Haenlein et al., 2006; Johnson et al., 2003; Aspara et al. (2009) arecaptured in commonly used valuation models. In the context of the current researchissue, the key weakness of many studies of the relationship between customersatisfaction and firm value is that as they do not relate satisfaction to earnings – themeasure that most executives focus on (Jacobson and Mizik, 2009). Thus, these studiesare limited in their ability to assist in enhancing managerial attention to satisfaction asa key performance metric.

3. Earnings, customer satisfaction and firm valueOur goal is to examine the relationship between earnings, satisfaction and firm value.As previously discussed, senior executives commonly focus on earnings as adeterminant of firm value. Therefore, we first consider the relationship betweenearnings and firm value.

In an efficient capital market, stock prices will reflect publicly available informationabout the firm – the efficient markets hypothesis (Fama, 1976). Earnings are animportant component of this information. Research in accounting has established arobust relationship between earnings and firm value (Kothari, 2001). Research has alsoestablished that investors form expectations of future cash flows and earnings usingcurrent earnings (Kormendi and Lipe, 1987). Financial analysts recognize the linkbetween earnings and firm value and routinely forecast earnings for listed companies(Healy and Palepu, 2001). In summary, considerable evidence exists that earningsprovide important information that investors use to form expectations about futureearnings and cash flows and firm value.

As outlined in the previous section, customer satisfaction has been linked to firmvalue. Broadly put, prior studies in marketing point to the positive impact thatcustomer satisfaction has on future payoffs in terms of sales growth and margins. Inthe current study, we integrate findings from accounting and marketing with respect tothe impact of earnings and customer satisfaction respectively on firm value. We formthe expectation that, consistent with findings from accounting and with seniormanagement’s focus, current earnings has an impact on firm value. In addition,reflecting findings from marketing, we expect that satisfaction also has a positiveimpact on firm value. Furthermore, we expect that the impact of satisfaction mayinfluence the earnings value relationship. We present a model of the constructs andtheir expected relationships in Figure 1.

4. ModelEmpirically, our aim is to examine whether customer satisfaction has an impact onfirm value, as measured by Tobin’s q, which is over and above the impact thatearnings. For our empirical work, we require a model that can incorporate Tobin’s q,accounting earnings and customer satisfaction in a consistent framework. We chooseto use the valuation model developed by Ohlson (1995) and subsequently extensivelyapplied in the accounting literature. This model allows us to incorporate Tobin’s q,

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accounting earnings and customer satisfaction in a model that is based on fundamentalfinance concepts.

These modelling choices have a number of advantages. Firstly, Tobin’s q is a wellestablished measure of financial performance that has been used in marketing studies(e.g. Anderson et al., 2004). It is the market value of the firm divided by the replacementcost of its assets. Thus, Tobin’s q is a measure of the value that has been created by thefirm using the resources at its disposal. Secondly, a key advantage of the Ohlson modelis that it expresses the market value of equity in terms of accounting numbers. Usingthis model, firms are valued using book value, residual earnings and other informationnot contained in financial statements. For our purposes, the ease with whichnon-financial information can be accommodated within the model is a major benefit.Thirdly, the Ohlson model is based on accounting earnings and thus reflects our focuson earnings. We present the Ohlson model in equation (1):

Pt ¼ yt þ a1xat þ a2vt ð1Þ

where:. Pt ¼ Price, per share, at the end of year t.. yt ¼ Book value per share, at the end of year t.. vt ¼ Information about value not contained in accounting numbers.. xat ¼ Residual earning per share for year t ¼ xt 2 r:yt21ð Þ.

where xt ¼ earnings per share for year t, r ¼ equity cost of capital.The Ohlson model expresses share price as a function of accounting book value,

residual earnings and other information about value. Residual earnings are accountingearnings less a nominal charge for the equity capital used to generate those earnings.

Figure 1.Conceptual framework


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831

Residual earnings reflect the value added because they adjust for the return that wouldbe expected by the shareholders to compensate them for the risk that they takeinvesting in the firm. Reflecting this, the Ohlson model is commonly referred to as theresidual earnings model (e.g. Penman, 2007). Accounting book value reflects the assetsthat the firm is using for its activities. The model works by splitting the firm’s valueinto three parts. Firstly, firm value is partly made up of the firm’s resources or assets(book value or yt). Secondly, firm value is partly made up of investor expectationsabout the profits that the firm will make in excess of those necessary to compensatethem for the risk they bear. This is captured by the product of current residualearnings (xat ) by a capitalisation factor (a1). Investor expectations about the future pathof residual income will be reflected in this capitalisation factor (a1). If investors expectthat the firm will add value (equivalent to having positive residual income) then thiscapitalisation factor will be higher. Thirdly, firm value can be affected by non-accountinginformation and this is reflected in the product of (vt) by a capitalisation factor (a2).

Empirically, the Ohlson model is better predictor of stock returns than P/Emultiples, discounted cash flow and book to price ratios (Frankel and Lee, 1998;Penman and Sougiannis, 1998; Penman and Xiao-Jun, 2002; Dechow et al., 1999;Francis et al., 2000). For our purposes, a key strength of the Ohlson model is that itallows for a consideration of both historical accounting measures, which are a focus ofmanagerial attention, and forward looking capital market-based valuations in a singlemodel. In a recent study, O’Sullivan and McCallig (2009) utilise the Ohlson model toexamine impact that customer satisfaction has on the earnings response coefficient.Specifically, they demonstrate that customer satisfaction moderates the relationshipbetween residual earnings and abnormal returns. In the current study, we extend thiswork through a consideration of the impact on firm value, as measured by Tobin’s q. Akey advantage of our study is that in using a measure of firm valuation – such asTobin’s q, we avoid the limitations of a stock returns response model such as thatemployed in O’Sullivan and McCallig (2009). As Srinivasan and Hanssens (2009) notestock returns response models are subject to specific limitations: the need for detailedmarketing data at the business unit level, the requirement that such information beknown to investors and the assumption of a causal link to stock response. Thus, ouruse of a valuation model and our focus on Tobin’s q provides the opportunity to testand extend findings from earlier studies.

Consistent with previous studies of the relationship between customer satisfactionand firm value (e.g. Anderson et al., 2004), we adopt Tobin’s q as a measure of thefirm’s economic performance. To achieve this, we add the amount of debt per share toboth sides of equation (1) and divide by total assets per share (TAt). As book value pluslong-term debt equals total assets, we develop the following equation:

Tobin’s qt ¼Pt þ LTDt

TAt¼ 1 þ a1

xatTAt

þ a2vt

TAtð2Þ

where LTDt ¼ firm borrowings per share.In the equation (2), the financial performance of the firm is represented by

capitalized residual income. For the purposes of our study, we consider marketinginvestments as having two primary effects on financial performance. Firstly,marketing investments consume firm resources (Conchar et al., 2005). For example, thecost of an advertising campaign or a quality improvement program that leads to better

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customer satisfaction are typically treated an accounting expense. This reducesaccounting earnings and residual income in the years in which costs are incurred. Italso reduces book value, which is the accountant’s measure of the value of the firm.Secondly, marketing investments boost future profits (Rust et al., 2004). Asinvestments pay-off in terms of sales growth and higher margins, investors expectfuture earnings and residual earnings to be higher. This expectation is reflected in firmvaluation through the capitalization factor (a1) in equation (2).

Consider two firms with exactly the same financial track record to date. Now endowone of the firms with better customer satisfaction than the other. The high customersatisfaction firm should have a higher Tobin’s q and a higher value due to investorsapplying a higher capitalization factor to its present residual income. This reflectsinvestor expectations that high customer satisfaction will convert into higher earningsand residual income in the future.

In equation (2), Tobin’s q depends on capitalized residual income deflated by totalassets and “other information” deflated by total assets. As prior studies have found arelationship between firm value and customer satisfaction (ACSI) that is not related tocurrent earnings (e.g. Ittner and Larcker, 1998), we allow customer satisfaction to formpart of the other information variable in equation (2). We also control for firm specificfactors that may impact on firm value, through the inclusion of market share (Mk_Sht)and advertising intensity (ADt/SALEt). We control for industry specific factorsthrough the Herfindahl-Hirchman index (Hindex) of industry concentration. Equation(3) represents the full empirical specification for our valuation model:

Tobin‘s qt ¼ 1 þ b1xatTAt

þ b2ACSI t þ b3ADt

SALEtþ b4Mk_Sht þ b5 Hindext

þ d1xatTAt

£ ACSI t

� �þ 1t ð3Þ

The null hypothesis is that in equation (3) the ACSI coefficient b2 ¼ 0, indicating thatcustomer satisfaction has no incremental value relevance – i.e. the inclusion ofcustomer satisfaction in the model does not improve our ability to explain firm value. Itis important to note that even if b2 ¼ 0, customer satisfaction could still effect firmvalue through its impact on the capitalization of current earnings. Consequently, whileb2 provides an estimate of the incremental impact of satisfaction, it is likely to be aconservative estimate of the full impact of satisfaction on firm value.

Intuitively, if customer satisfaction implies better profitability and value creation inthe future, this should be reflected in a higher capitalization factor on current residualearnings. Building on the market based assets theory (Srivastava et al., 1998) and thevalue creation/appropriation framework (Mizik and Jacobson, 2003), we expect thatcustomer satisfaction, in addition to having a direct impact on Tobin’s q, will alsomoderate the earnings-firm value relationship. We test this using a moderatingvariable. The coefficient d1 in equation (3) reflects the extent to which ACSI moderatesthe relationship between residual earnings and Tobin’s q. A value of d1 – 0 wouldindicate that the capitalization coefficient on residual earnings (a1) is impacted by thelevel of customer satisfaction (Table I).


firm value

833

5. Data sourcesWe draw customer satisfaction data from ACSI, provided by the National QualityResearch Centre at the University of Michigan. ACSI gives a firm level measure ofcustomer satisfaction for approximately 200 American firms. ACSI data has beencollected each year since 1994. Our sample covers all firms for which ACSI data couldbe matched to COMPUSTAT data from 1994 to 2005. Each observation constitutes afirm year. We provide the descriptive statistics for the sample in Table II.

We calculate residual income as the firm’s earnings less lagged book valuemultiplied by the cost of capital. Given that previous studies have had limited successin identifying predictable variations in expected returns that are consistent with theasset pricing models (Lee, 1999), we use a discount rate of 12 per cent. This is in line

Variable Definition Compustat code

Pt Price, per share, at the firm’s fiscal year end PRCCMTAt Total assets per share, at the end of fiscal year t AT (#6)LTDt Long-term debt per share included in long-term

liabilities at the end of fiscal year tDLTT (#9)

Tobin’s q (Pt þ LTDt)/TAt

Xt Earnings per share, excluding extraordinary itemsand discontinued operation, for the fiscal year t

EPSPX (#58)

xat Residual earnings for fiscal year t. Residual earningsis defined as Xt 2 ( yt-1 x .12). This assumes a cost ofcapital of 12 per cent. Residual earnings arecalculated for firms with negative book value

yt Book value per share of common shareholder’sequity at the end of fiscal year t

CEQ (#60)

ACSIt Firm’s customer satisfaction (ACSI) score in year tADt Advertising expense for year t XAD (#45)SALEt Sales for year t SALE (#12)Mk_Sh Firm’s market share within a three digit sic-code

industryHindex The Herfindahl-Hirschman index of industry

concentration for the firm’s three digit sic-codeTable I.Variable definitions

Variable * n Mean SD Lower quartile Median Upper quartile

Tobin’s qt 881 1.62 0.87 0.98 1.31 2.03xatTAt

0.01 0.05 20.01 0.01 0.04

ACSIt 75.64 6.31 72.00 76.00 80.00ADt

SALEt0.02 0.03 0.00 0.01 0.03

Mk_Sht 0.11 0.14 0.02 0.06 0.12

Hindext 0.10 0.10 0.04 0.07 0.14

Notes: The sample contains all of the firm-year observations with data on COMPUSTAT that couldbe matched with ACSI data. The observations in the top or bottom one percent of observations rankedon residual earnings deflated by total assets, Tobin’s q and advertising intensity have been deleted.Each firm had to have at least four years of data in the sample; *See Table I for variable definitions

Table II.Descriptive statistics forfirm-year observationsfor the years 1994-2005

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with prior studies in marketing (e.g. Gupta et al., 2004) and common practice inaccounting (e.g. Dechow et al., 1999).

We calculate market share and industry concentration as follows. COMPUSTATcollects segmental sales for all US listed companies from 10K disclosures. For example,Time Warner Inc. (TWX) has three business segments that have ACSI scores. Theseare Cable TV, CNN and AOL. We collect segmental sales from COMPUSTAT for thesedivisions of Time Warner and use these sales to calculate market share and industryconcentration for each of Time Warner’s businesses. Industry sales were calculated aseither segmental sales or company sales (for one segment companies) for all segmentsor companies in the same three digit SIC code for all of the firms in COMPUSTAT. Wecalculate market share by dividing the segmental sales that best matched the companysegment the ACSI data relates to by the industry sales. We measure concentration asthe sum of the squares of the market shares of firms in the industry.

6. FindingsTable III presents a correlation matrix for the variable set. The highest correlation isbetween market share and industry concentration. This is not surprising given therelationship between these variables. The second highest correlation is for Tobin’s qand residual earnings over total assets, highlighting the importance of earnings-basedmeasures in valuation studies. While some of the correlations between variables arehigh in this sample, an analysis of variance inflation factors showed that scaling thevariables by total assets had been effective in reducing collinearity to acceptable levels.

Table IV provides results for time-series cross-section regressions of Tobin’s q onearnings deflated by total assets, customer satisfaction, advertising intensity, marketshare, industry concentration, and the interaction between residual earnings andcustomer satisfaction. This model deals with panel data sets that consist of time seriesobservations on each of several cross-sectional units. We use a two-way random effectsmodel that assumes random time-series and cross-sectional effects. The model helps tocontrol for unobserved time and firm effects (Wooldridge, 2002). All of the regressionresults in the paper are based on this regression model. We build our regression modelin stages in order to document whether the inclusion of customer satisfaction in themodel improves our ability to explain firm value. In Table IV, Tobin’s q is regressed onresidual earnings (model 1), residual earnings and control variables (model 2) andresidual earnings, customer satisfaction and control variables (model 3). Finally,

Tobin’s qtxatTAt

ACSItADt

SALEtMk_Sht

xatTAt

0.571 * * *

ACSIt 0.238 * * * 0.209 * * *

ADt

SALEt0.467 * * * 0.308 * * * 0.255 * * *

Mk_Sht 0.306 * * * 0.164 * * * 0.076 * * * 0.207 * * *

Hindext 0.255 * * * 0.146 * * * 0.126 * * * 0.274 * * * 0.765 * * *

Notes: *p , 0.10; * *p , 0.05; * * *p , 0.01

Table III.Pearson correlation

coefficients


firm value

835

a1

b1

b2

b3

b4

b5

d1

nn

T-

stat

isti

cn

T-

stat

isti

cn

T-

stat

isti

cn

T-

stat

isti

cn

T-

stat

isti

cn

T-

stat

isti

cn

T-

stat

isti

cR

2

(%)

Mod

el1

881

1.58

7*

**

18.2

73.

422

**

*9.

579.

4M

odel

288

11.

598

**

*14

.24

3.21

0*

**

9.07

20.

223

20.

342

0.52

72

1.44

0.52

5*

*1.

449.

1M

odel

388

10.

222

0.54

3.12

2*

**

8.84

0.01

8*

**

3.47

0.09

70.

072

0.50

32

1.39

0.49

91.

3710

.4M

odel

488

10.

387

0.96

3.96

2*

**

10.0

60.

015

**

*3.

012

0.19

12

0.15

20.

390

21.

090.

447

1.24

1.52

1*

**

4.55

12.6

Notes:

Tobin

‘sq

t¼

a1þ

b1

xa t

TAtþ

b2ACSI tþ

b3

ADt

SALEtþ

b4Mk_Shtþb

5Hindex

tþ

d1

xa t

TAt£ACSI t

�� ;

Res

ult

sfr

omti

me-

seri

escr

oss-

sect

ion

alre

gre

ssio

ns,

excl

ud

ing

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iers

,of

Tob

in’s

qon

resi

du

alea

rnin

gs,

cust

omer

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sfac

tion

,ad

ver

tisi

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inte

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ty,

mar

ket

shar

e,in

du

stry

con

cen

trat

ion

and

inte

ract

ion

var

iab

les.

Th

esa

mp

leco

ver

s19

94-2

005

and

con

tain

sal

lof

the

firm

-yea

rob

serv

atio

ns

wit

hd

ata

onC

OM

PU

ST

AT

that

cou

ldb

em

atch

edw

ith

AC

SI

dat

a.T

he

obse

rvat

ion

sin

the

top

orb

otto

mon

ep

erce

nt

ofob

serv

atio

ns

ran

ked

onea

rnin

gs

defl

ated

by

tota

las

sets

,Tob

in’s

qan

dad

ver

tisi

ng

inte

nsi

tyh

ave

bee

nd

elet

ed.

Eac

hfi

rmh

adto

hav

eat

leas

t4

yea

rsof

dat

ain

the

sam

ple

.See

Tab

leI

for

var

iab

led

efin

itio

ns;

Th

etw

o-ta

iled

sig

nifi

can

ceof

the

t-st

atis

tics

isin

dic

ated

as:

* sig

at0.

10,

** s

igat

0.05

,*

** s

igat

0.01

lev

el

Table IV.Regression of Tobin’s qon residual earnings,customer satisfaction,firm and industryvariables – regressioncoefficients from two wayrandom effects estimation

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836

Tobin’s q is regressed on residual earnings, customer satisfaction, the control variablesand a moderating variable based on residual earnings and ACSI.

The results presented in Table IV indicate that residual earnings have a positiveand significant effect on Tobin’s q in each of the models. A positive relationshipbetween a valuation measure such as Tobin’s q and residual earnings is consistentwith pervious studies in the accounting literature (e.g. Kothari, 2001) and with amanagerial focus on earnings as a determinant of firm value (Graham et al., 2005). Wepresent this result as evidence of the market perception that current earnings containinformation about future earnings as well as current performance (Mizik and Jacobson,2003).

Model 4 in Table IV provides results for the full regression equation. Theexplanatory power of Model 4 has increases to 12.6 per cent from 9.4 per cent for model1, which includes residual earnings only. Predictably, the main effect of residualearnings on Tobin’s q is positive and significant (b1 ¼ 3.962, p , 0.01). Both customersatisfaction and the interaction between customer satisfaction and residual earningshave a positive and significant relationship with Tobin’s q. The positive coefficient forACSI (b2 ¼ 0.015, p , 0.01) indicates that investors view customer satisfaction asbeing incrementally informative to current residual earnings in estimating the futureperformance of firms. These results are consistent with the recent findings ofO’Sullivan and McCallig (2009) with respect to the interaction between customersatisfaction and earnings in explaining stock returns.

As the interaction term between ACSI and residual earnings is positive (d1 ¼ 1.521,p , 0.01) and significant, we conclude that customer satisfaction moderates theresidual earnings-Tobin’s q relationship. Put differently, customer satisfactioninfluences valuation directly and positively moderates the relationship betweenresidual earnings and valuation. Moderation of the residual earnings – firm valuerelationship indicates that customer satisfaction influences the market’s expectationsabout firm’s future earnings. These results are consistent with the market based assetstheory (Srivastava et al., 1998). Our findings indicate that the magnitude of customersatisfaction’s moderating influence on firm value is greater than its direct effect onvalue. This implies that the impact of customer satisfaction on firm value can primarilybe explained through its impact on expectations about future residual earnings.

7. DiscussionResearch on the relationship between marketing and firm value has largely focused onexamining how marketing performance indicators, such as brand and customermetrics, affect firm value. Within this research stream, customer satisfaction, asmeasured by ACSI, has received particular attention. However, to date, considerationof the impact of customer satisfaction on firm value has largely ignored currentearnings. Yet, current earnings are a focus of attention for both senior executives andinvestors. If a goal of studies linking marketing to firm value is to enhance marketing’saccountability and relevance to senior management (Rust et al., 2004), then it seemsappropriate to include a consideration of earnings, the financial performance measureof particular interest to executives. In the current study, we consider the impact ofcustomer satisfaction on firm value in a model that includes earnings. We find thatsatisfaction, as measured by ACSI, has a significant influence on firm value, asmeasured by Tobin’s q. We also examine the impact that customer satisfaction has on


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the earnings – firm value relationship. Our research is motivated by the importanceinvestors and senior managers place on earnings as a performance measure, and by thepotentially negative impact that this has on a firms’ market based assets and the role ofmarketing within the firm.

7.1 Theoretical contributionsOur research contributes both substantively and methodologically. The importantsubstantive contribution of our research is in demonstrating that the impact ofcustomer satisfaction on firm value can be established in an earnings-based valuationmodel. Specifically, we show that customer satisfaction has an impact of firm value,which is over and above the impact of earnings. We also show that customersatisfaction positively moderates the earnings – firm value relationship. Thesefindings complement and extend recent work on the impact of customer satisfaction onfuture cash flows (e.g. Gruca and Rego, 2005) and earnings expectations (O’Sullivanand McCallig, 2009).

Our research also contributes methodologically. This is one of the first studies inmarketing to adopt a model that has gained widespread acceptance in accounting –the Ohlson model. We employ the model to demonstrate the impact of a key marketingmetric – customer satisfaction on firm value. In our specification of the model, wemeasure firm value using Tobin’s q. Two advantages of this measure are that, firstly, itavoids the methodological concerns associated with stock returns response modelling(Srinivasan and Hanssens, 2009). Secondly, Tobin’s q is commonly specified inmarketing studies. Thus, we are able demonstrate a method by which researchers inmarketing can express the relationship between marketing assets and firm value in amanagerially relevant framework – an earnings-based valuation model. Such researchcan enhance the dialogue between marketing and accounting.

7.2 Managerial implicationsOur findings also have important managerial implications. Studies in accounting,economics, finance and marketing suggest that a managerial focus on current earningsarises from a perception that the share market, through its reliance on earnings insetting share prices, incentives such behaviour (Barth et al., 1999; Rappaport, 2005;Mizik and Jacobson, 2007; Stein, 1989). As both Jacobson and Aaker (1993) and morerecently Mizik and Jacobson (2007) argue, if the focus on current earnings is to bemitigated, the market needs access to reliable signals as to the value of marketingactivities and assets. Our finding indicates that such signals are available and that themarket is responsive. We find that firm value is influenced by earnings, customersatisfaction and the interaction between these two metrics. Our demonstration of thiscomplementary relationship between current earnings and customer satisfactionshould further encourage executives to engage with satisfaction as a key performancemetric.

7.3 Limitations and future researchThere are a number of limitations to our research that give rise to interesting areas forfurther study. First, it is important to note that we use ACSI as a measure of customersatisfaction. Whether the market responds to ACSI or to other measures of customersatisfaction is unclear. While this is not an issue of particular concern for the purposes

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of our study, research on firms not covered by ACSI would provide a valuablecontribution to this research stream. Second, while the Ohlson model is widely used inthe accounting literature, like all valuation models, it has assumptions that are not fullymet in empirical studies (e.g. Lo and Lys, 2000). In particular, the model assumes aperfectly functioning capital market. Our findings, based on the model indicate thatfirm value is responsive to changes in customer satisfaction. Yet, we cannot commenton the extent to which the market is efficient in responding to information on futurerevenue contained in customer satisfaction. Recent studies have addressed this issue indepth (Jacobson and Mizik, 2009; O’Sullivan et al., 2009). Further studies of therelationship between customer satisfaction, earnings and firm value might look toincorporate a consideration of the psychological factors influencing investorbehaviour. Future work might also usefully consider the impact of any delayedmarket reaction to customer satisfaction information. In addition, the impact ofinformation asymmetry and agency costs, which are not considered in the model,deserve attention.

Notes

1. Tobin’s q is used extensively in studies of the impact of marketing on firm value (e.g.Anderson et al., 2004; Rao et al., 2004).

2. While sales growth is the most commonly used performance measure in the strategicmanagement literature (Weinzimmer et al., 1998), the finance literature focuses on cash flow(sales revenue less the costs incurred in generating these revenues). While sales growthshould lead to improved cash flow this is not always the case (Kerin et al., 1990). Further,given that one of the benefits of customer satisfaction is reduced transaction costs, cash flowis a more relevant measure of performance.

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Further reading

Aspara, J. and Tikkanen, H. (2008), “Interactions of individuals’ company-related attitudes andtheir buying of the companies’ stocks and products”, Journal of Behavioral Finance, Vol. 9No. 2, pp. 85-94.

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McAlister, L., Srinivasan, R. and Kim, M. (2007), “Advertising, research and development, andsystematic risk of the firm”, Journal of Marketing, Vol. 71, January, pp. 35-48.

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Corresponding authorDon O’Sullivan can be contacted at: [email protected]


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