Abstract
This paper examines the effect of customer satisfaction with firms’ products and services on their capital investment policies. Using data from the American Customer Satisfaction Index from 1994 to 2013, we find that firms with high customer satisfaction will invest more in capital expenditures in the future. We further show that this positive effect is more pronounced for firms with less growth opportunities or a high cost of capital. This would include those firms with low market-to-book ratios, young and small firms, or firms in more competitive industries. This evidence is therefore consistent with the hypothesis that high customer satisfaction helps generate high growth opportunities and reduces the cost of capital, both of which motivate firms to increase their capital investment.
Highlights
Customer satisfaction with firms’ products and services has attracted attention from both public media and academics (Ludvigson 2004)
If customer satisfaction generates more expected cash flows for firms in the future, its effect on capital expenditures is expected to be stronger for firms with less growth opportunities. Consistent with this expectation, using the market-to-book ratio to capture a firm’s growth opportunities, we show that firms with low market-to-book ratios will invest more in capital expenditures when they have high customer satisfaction
This paper investigates the effect of customer satisfaction with a firm’s products and services on its capital investments
Summary
Customer satisfaction with firms’ products and services has attracted attention from both public media and academics (Ludvigson 2004). Because high customer satisfaction generates a loyal and stable customer base (e.g., Bolton 1998; Mittal, Kamakura 2001; Sengupta et al 2015), it can reduce a firm’s cash flow fluctuations (Tuli, Bharadwaj 2009) as well as the cost of capital for such firms in the future. Consistent with this argument, Tuli and Bharadwaj (2009) find that investments in customer satisfaction help firms reduce both systematic and idiosyncratic risks. We expect that the effect of customer satisfaction on a firm’s capital investments is stronger for firms in more competitive industries
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