Ana Vidolovska Simpson

Do Customer Acquisition Cost, Retention and Usage Matter to Firm Performance and Valuation?

We examine the valuation role of customer acquisition cost, retention and usage in the wireless industry during the period 1997–2004. We develop and test a model that links customer acquisition cost, customer retention and call usage to future financial performance and valuation. In doing so, we control for the role of traditional accounting measures as predictors of firm performance. Although the wireless industry maintains a rapid pace of technological and commercial changes, fundamental accounting numbers are found to be value relevant. We provide new evidence that customer acquisition cost is likely a firm value driver. Specifically, we show that this cost is positively associated with customer retention, future profits and current market values. However, customer acquisition cost is not associated with future revenues, suggesting that successful investment in customer acquisition is capable of saving future expenses and hence of improving profitability. There does not seem to be a direct association between customer retention and usage. Nevertheless, we document a positive relation between retention and future revenues, as well as a positive association between usage and future profits. Collectively, these results suggest that retention and usage play an important mediating role linking customer acquisition with benefit generation. Consistent with this, we find some evidence that customer retention and usage enhance market values.

Do Customer Acquisition Cost, Retention and Usage Matter to Firm Performance and Valuation?: CUSTOMER ACQUISITION COST, FIRM PERFORMANCE AND VALUATION

We examine the valuation role of customer acquisition cost, retention and usage in the wireless industry during the period 1997-2004. We develop and test a model that links customer acquisition cost, customer retention and call usage to future financial performance and valuation. In doing so, we control for the role of traditional accounting measures as predictors of firm performance. Although the wireless industry maintains a rapid pace of technological and commercial changes, fundamental accounting numbers are found to be value relevant. We provide new evidence that customer acquisition cost is likely a firm value driver. Specifically, we show that this cost is positively associated with customer retention, future profits and current market values. However, customer acquisition cost is not associated with future revenues, suggesting that successful investment in customer acquisition is capable of saving future expenses and hence of improving profitability. There does not seem to be a direct association between customer retention and usage. Nevertheless, we document a positive relation between retention and future revenues, as well as a positive association between usage and future profits. Collectively, these results suggest that retention and usage play an important mediating role linking customer acquisition with benefit generation. Consistent with this, we find some evidence that customer retention and usage enhance market values.

Capitalization vs Expensing and the Behavior of R&D Expenditures

We examine the effect of capitalization vs expensing on UK firms’ R&D expenditures. Our investigation is motivated by the UK’s mandatory switch from UK GAAP to IFRS in 2005. Under UK GAAP, firms could elect to expense or capitalize development expenditures, but IFRS mandates capitalization. Thus, “capitalizers” maintained their accounting method, while “switchers” were required to change from expensing to capitalization. Using a difference-in-difference design, we examine the effect of the rule change on the amount and riskiness of the two groups’ R&D expenditures. Consistent with arguments that expensing’s deleterious effect on income causes firms to reduce their R&D outlays, we find that switching firms increased their R&D expenditures more than firms that continued to capitalize. We subject our results to numerous robustness tests, using propensity score matched samples, comparing early vs late switchers, switchers with high vs low R&D expenditure growth, examining R&D behavior in the last year before IFRS adoption, and a placebo test in which we alter the switch date. Across all of these tests, our results support the conclusion that the accounting method affects the amount that firms invest in R&D. Our results attest to the real effects of accounting policy on firms’ R&D investments.