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Customer Capital

  • Leena Rudanko

    (Boston University)

  • Francois Gourio

    (Boston University)

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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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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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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