Customer Referencing and Capital Market Benefits: Evidence from the Cost of Equity
68 Pages Posted: 28 Apr 2020
Date Written: April 1, 2020
Customer referencing refers to the phenomenon whereby a firm discloses its connections with reputable customers in order to improve its own reputation. Consistent with this disclosure increasing investor attention and providing customer certification, we find that supplier firms enjoy a lower cost of equity when they engage in customer referencing. In cross-sectional tests, we find that the benefits of customer referencing are more pronounced for supplier firms: i) without reputable major customers, ii) whose referenced customer’s reputation greatly exceeds their own, iii) facing higher competition, or (iv) that supply a larger proportion of the referenced customer’s products. Overall, our study provides evidence that communicating inter-organizational connections to investors can bring capital market benefits to the disclosing firms.
Keywords: customer referencing; customer reputation; cost of equity
JEL Classification: M40; M41
Suggested Citation: Suggested Citation