Customer Churn and Intangible Capital

Abstract

Intangible capital is a crucial and growing piece of firms' capital structure, but the multitude of distinct components are difficult to measure. We develop and make available several new firm-level metrics regarding a key component of intangible capital -- firms' customer bases -- using an increasingly common class of household transaction data. Linking household spending to customer-facing firms that make up over 30% of consumer spending, we show that churn in customer bases is associated with lower markups and market-to-book ratios and higher leverage. Churn is closely linked to firm-level volatility and risk, both cross-sectionally and over time. This new measure provides a clearer picture of firms' customer and brand capital than existing metrics like capitalized SG&A, R&D, or advertising expenditures and is also observable for private firms. We demonstrate that low levels of customer churn push firms away from neoclassical investment responsiveness and that low churn firms are better able to insulate organization capital from the risk of key talent flight.

Keywords: customer base, customers, transaction data, customer churn

JEL Classification: D22, E22, G32, L11