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Customer Capital

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  • Leena Rudanko

    (Boston University)

  • Francois Gourio

    (Boston University)

Abstract

Firms spend significant resources on creating and maintaining long-term customer relationships. We explore the role of this customer capital - a form of intangible capital - for firm valuation and physical investment. We build a general equilibrium model of long-term customer relationships, where existing customers are partially locked-in due to frictional product markets, and firms advertise, competing for customers by offering discounts. Calibrating the model, we find that it reproduces the low correlation of investment with Tobin’s Q, and the high correlation of investment with cash flows found in data. Consistent with our model, we find that in the data investment is more correlated with cash flows, and less with Q, in industries where customer capital (as proxied by advertising expenses) is more important.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 121.

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Date of creation: 2010
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Handle: RePEc:red:sed010:121

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Cited by:
  1. Belo, Frederico & Lin, Xiaoji & Vitorino, Maria Ana, 2013. "Brand Capital and Firm Value," Working Paper Series 2013-04, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  2. Volker Tjaden, 2013. "Foreign Customer Accumulation and Export Dynamics," Bonn Econ Discussion Papers bgse06_2013, University of Bonn, Germany.
  3. Luigi Paciello & Andrea Pozzi & Nicholas Trachter, 2013. "Price Setting with Customer Retention," EIEF Working Papers Series 1328, Einaudi Institute for Economics and Finance (EIEF), revised Nov 2013.
  4. Francois Gourio & Leena Rudanko, 2014. "Can Intangible Capital Explain Cyclical Movements in the Labor Wedge?," NBER Working Papers 19900, National Bureau of Economic Research, Inc.
  5. King, Philip & Millard, Stephen, 2014. "Modelling the service sector," Bank of England working papers 500, Bank of England.
  6. Allen Tran, 2013. "Customer Driven Establishment Dynamics and Allocative Efficiency," 2013 Meeting Papers 115, Society for Economic Dynamics.
  7. Jae Sim & Raphael Schoenle & Egon Zakrajsek & Simon Gilchrist, 2013. "Inflation Dynamics During the Financial Crisis," 2013 Meeting Papers 826, Society for Economic Dynamics.
  8. Daniel P. Murphy, 2013. "Why are goods and services more expensive in rich countries? demand complementarities and cross-country price differences," Globalization and Monetary Policy Institute Working Paper 156, Federal Reserve Bank of Dallas.
  9. Costas Arkolakis, 2011. "A Unified Theory of Firm Selection and Growth," NBER Working Papers 17553, National Bureau of Economic Research, Inc.
  10. Andrea Pozzi & Fabiano Schivardi, 2012. "Demand or Productivity: What Determines Firm Growth?," Development Working Papers 344, Centro Studi Luca d\'Agliano, University of Milano, revised 13 Nov 2012.
  11. Takayuki Mizuno & Wataru Souma & Tsutomu Watanabe, 2014. "The Structure and Evolution of Buyer-Supplier Networks," CARF F-Series CARF-F-339, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
  12. Larkin, Yelena, 2013. "Brand perception, cash flow stability, and financial policy," Journal of Financial Economics, Elsevier, vol. 110(1), pages 232-253.
  13. Lu Zhang & Chen Xue & Frederico Belo, 2012. "Accounting for Value," 2012 Meeting Papers 1128, Society for Economic Dynamics.
  14. Atushi Ishikawa & Shouji Fujimoto & Takayuki Mizuno & Tsutomu Watanabe, 2014. "Analytical Derivation of Power Laws in Firm Size Variables from Gibrat’s Law and Quasi-inversion Symmetry: A Geomorphological Approach," UTokyo Price Project Working Paper Series 019, University of Tokyo, Graduate School of Economics.
  15. Mizuno, Takayuki & Souma, Wataru & Watanabe, Tsutomu, 2014. "The Structure and Evolution of Buyer-Supplier Networks," Working Paper Series 27, Center for Interfirm Network, Institute of Economic Research, Hitotsubashi University.
  16. Philip King & Stephen Millard, 2014. "Modelling the service sector," Discussion Papers 1401, Centre for Macroeconomics (CFM).

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