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

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