Customer Capital in Times of Crisis

Abstract

What are the long-run effects of recessions on firm sales? Firm sales should naturally recover if existing customers resume buying after the recession. Using a French reform as a financing shock, we show that after the 2008-9 international trade collapse, financially constrained firms sell 30% less to customers who paused trading during the trade collapse. This finding indicates that firms must reinvest in customer relationships after periods of reduced activity to win customers back, i.e., recessions damage customer capital. Firms win customers back by upgrading product quality, and customers are more likely to return when firms offer better products ex-ante.

Keywords: F14, L14, L15, financial constraints, product quality, trade credit, international trade, customer capital

JEL Classification: F14, L14, L15, G32