Customer Referencing and Capital Market Benefits: Evidence from the Cost of Equity

Abstract

Customer referencing is a strategy that firms can use to disclose their connections with reputable customers as a means of enhancing their own reputations. We find that firms enjoy a lower cost of equity when they engage in customer referencing in their financial reports, consistent with this disclosure increasing investor attention and customer certification. In cross-sectional tests, we find that the benefits of customer referencing are more pronounced for firms that (i) lack major customers or reputable major customers, (ii) mention customers whose reputations exceed their own, and (iii) face higher competition. Overall, our study provides evidence that communicating certain inter-organizational connections can garner capital market benefits for the disclosing firms.

Keywords: customer referencing; customer reputation; cost of equity

JEL Classification: M40; M41