Customer Franchise — A Hidden, Yet Crucial Asset

43 Pages Posted: 25 Jan 2010 Last revised: 20 Jul 2014

See all articles by Massimiliano Bonacchi

Massimiliano Bonacchi

Free University of Bolzano - Faculty of Economics and Management; New York University (NYU) - Department of Accounting

Kalin S. Kolev

City University of New York (CUNY) - Stan Ross Department of Accountancy

Baruch Lev

New York University - Stern School of Business

Date Written: November 1, 2013

Abstract

We introduce a measure of customer franchise value for subscription–based companies — a fast growing and vital sector of the economy. This measure is based on information voluntarily disclosed by some, but not all, firms. Controlling for self-selection, we examine the measure’s information content and find that customer value is significantly positively associated with stock price and this association is incremental to both GAAP and a set of non-GAAP variables typically considered in valuation tests. Furthermore, we show that the customer value measure is positively associated with future earnings and analysts’ forecast errors. Importantly, we find that the documented results are robust to controlling for the individual inputs used to derive the measure, highlighting the need to consider the interaction between stand-alone value drivers in assessing a firm’s performance. These findings indicate that the proposed measure of customer value is an important valuation tool that quantifies and summarizes the main trends and factors underlying the performance of subscription-based enterprises. This study informs researchers and investors, as well as accounting policymakers, about a major value–generating asset currently missing from corporate financial reports.

Keywords: Customer Equity, Intangibles, Nonfinancial Information, Forecasting Earnings, Subscription-Based Business Model

JEL Classification: M41, M44, G12

Suggested Citation

Bonacchi, Massimiliano and Kolev, Kalin S. and Lev, Baruch Itamar, Customer Franchise — A Hidden, Yet Crucial Asset (November 1, 2013). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1540764 or http://dx.doi.org/10.2139/ssrn.1540764

Massimiliano Bonacchi (Contact Author)

Free University of Bolzano - Faculty of Economics and Management ( email )

Universitätsplatz, 1
Bozen-Bolzano, BZ 39100
Italy
+39 0471 013290 (Phone)

HOME PAGE: http://www.unibz.it/en/economics/people/StaffDetails.html?personid=35968&hstf=35968

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

HOME PAGE: http://www.stern.nyu.edu/faculty/bio/massimiliano-bonacchi

Kalin S. Kolev

City University of New York (CUNY) - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States

Baruch Itamar Lev

New York University - Stern School of Business ( email )

40 West 4th Street, Suite 400
New York, NY 10012
United States
212-998-0028 (Phone)
212-995-4001 (Fax)

HOME PAGE: http://www.baruch-lev.com

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