Customer Satisfaction and the Cost of Capital

Review of Accounting Studies, forthcoming

Posted: 17 Jan 2017 Last revised: 21 Jul 2020

See all articles by Cameron Truong

Cameron Truong

Monash University; Financial Research Network (FIRN)

Hannah Nguyen

Monash University - Monash Business School - Department of Banking and Finance

Thanh Huynh

Monash University - Department of Banking and Finance

Date Written: July 16, 2020

Abstract

Using a sample of U.S. firms from 1995 through 2015 and the customer satisfaction scores from the American Customer Satisfaction Index, we find strong evidence that firms with higher customer satisfaction scores enjoy lower cost of equity capital, even after controlling for other factors that determine the cost of equity. In addition, results from a propensity score-matched sample analysis, a difference-in-differences analysis, and instrumental variable regressions suggest that our findings are robust to accounting for endogeneity. We also document that customer satisfaction is positively related to investor recognition and financial report quality. The effect of customer satisfaction on the cost of equity increases with the level of information asymmetry, consistent with customer satisfaction mitigating information asymmetry. Overall, our findings suggest that customer satisfaction lowers a firm’s risk and significantly attenuates its financing costs.

Keywords: customer satisfaction, corporate reputation, cost of equity, cost of capital

JEL Classification: G30, G32

Suggested Citation

Truong, Cameron and Nguyen, Thu Ha and Huynh, Thanh D., Customer Satisfaction and the Cost of Capital (July 16, 2020). Review of Accounting Studies, forthcoming, Available at SSRN: https://ssrn.com/abstract=2900653

Cameron Truong (Contact Author)

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Thu Ha Nguyen

Monash University - Monash Business School - Department of Banking and Finance ( email )

PO Box 197
Caulfield East, VIC 3145
Australia

Thanh D. Huynh

Monash University - Department of Banking and Finance ( email )

Melbourne
Australia

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