Customer Satisfaction, Analyst Stock Recommendations, and Firm Value

Abstract

Although managers are interested in the financial value of customers and researchers have pointed out the importance of stock analysts who advise investors, no studies to date have explored the implications of customer satisfaction for analyst stock recommendations. Using a large-scale longitudinal data set, the authors find that positive changes in customer satisfaction not only improve analyst recommendations but also lower dispersion in those recommendations for the firm. These effects are stronger when product market competition is high and financial market uncertainty is large. In addition, analyst recommendations at least partially mediate the effects of changes in satisfaction on firm abnormal return, systematic risk, and idiosyncratic risk. Analyst recommendations represent a mechanism through which customer satisfaction affects firm value. Thus, if analysts pay attention to Main Street customer satisfaction, Wall Street investors should have good reason to listen and follow. Overall, this research reveals the impact of satisfaction on analyst-based outcomes and firm value metrics and calls attention to the construct of customer satisfaction as a key intangible asset for the investor community.

Keywords: customer satisfaction, financial analysts, competition, marketing-finance interface, stock recommendations, return, risk

JEL Classification: M21, M31, G00, G12, L86, M00, M30, M14