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Do Investors Use Customer Metrics To Value High Growth Service Firms?

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  • Neeraj J. Gupta
  • Joseph Golec

Abstract

High growth service firms invest resources to acquire and retain customers, creating intangible assets. This paper tests whether investors use customer metrics to value these firms. Using a unique handcollected data set, we show that investors discount the values of high growth service firms if their service costs per customer are high, perhaps because high service costs are associated with inefficient business operations. Conversely, investors boost the values of high growth service firms with high acquisition costs per customer, perhaps because higher acquisition costs are associated with customers who generate larger future cash flows. We also show that relatively high growth firms tend to disclose customer metrics more frequently, monthly rather than quarterly, helping to moderate the inherent uncertainty in their quarterly earnings. We find that customer metrics are incrementally informative to traditional financial performance measures, particularly when valuing high-growth service firms.

Suggested Citation

  • Neeraj J. Gupta & Joseph Golec, 2012. "Do Investors Use Customer Metrics To Value High Growth Service Firms?," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 6(2), pages 1-19.
    • Handle: RePEc:ibf:ijbfre:v:6:y:2012:i:2:p:1-19
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    More about this item

    Keywords

    Customers; Valuation; Intangibles;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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