Do Investors Use Customer Metrics to Value High Growth Service Firms?

The International Journal of Business and Finance Research, Vol. 6, No. 2, pp. 1-19, 2012

19 Pages Posted: 5 Jan 2012

See all articles by Neeraj Gupta

Neeraj Gupta

affiliation not provided to SSRN

Joseph H. Golec

University of Connecticut - Department of Finance

Date Written: 2012

Abstract

High growth service firms invest resources to acquire and retain customers, creating intangible assets. This paper tests whether investors use customer metrics to value these firms. Using a unique hand collected data set, we show that investors discount the values of high growth service firms if their service costs per customer are high, perhaps because high service costs are associated with inefficient business operations. Conversely, investors boost the values of high growth service firms with high acquisition costs per customer, perhaps because higher acquisition costs are associated with customers who generate larger future cash flows. We also show that relatively high growth firms tend to disclose customer metrics more frequently, monthly rather than quarterly, helping to moderate the inherent uncertainty in their quarterly earnings. We find that customer metrics are incrementally informative to traditional financial performance measures, particularly when valuing high-growth service firms.

Keywords: customers, valuation, intangibles

JEL Classification: G12, G14, M41

Suggested Citation

Gupta, Neeraj and Golec, Joseph, Do Investors Use Customer Metrics to Value High Growth Service Firms? (2012). The International Journal of Business and Finance Research, Vol. 6, No. 2, pp. 1-19, 2012, Available at SSRN: https://ssrn.com/abstract=1948777

Neeraj Gupta (Contact Author)

affiliation not provided to SSRN ( email )

Joseph Golec

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

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