Forrest V. Morgeson

Commentary---The Economic and Statistical Significance of Stock Returns on Customer Satisfaction

According to Jacobson and Mizik [Jacobson, R., N. Mizik. 2009. The financial markets and customer satisfaction: Reexamining possible financial market mispricing of customer satisfaction. Marketing Sci.28(5) 810--819], excess stock portfolio returns for firms with strong customer satisfaction are small and statistically insignificant, and if there is any above-market performance at all, it is due to a small set of firms in the computer and Internet industries. But their data seem to suggest the opposite. The returns are actually both exceptionally large and significant. Using monthly data, their portfolio consisting of strong American Customer Satisfaction Index (ACSI) firms outperformed the market by 0.0053, corresponding to 6.4% cumulative risk-adjusted above-market returns on an annual basis over a 10-year period---a performance that would beat at least 99% of all large-cap U.S. stock funds tracked by Morningstar. Using a different treatment of risk, their annualized risk-adjusted return is a whopping 8.4% better than market. After eliminating computer, Internet, and utility companies, they find that the monthly risk-adjusted abnormal returns drop to 0.0045, which corresponds to an annual above-market return of 5.4%. This too is better than 99% of all actively managed stock funds in the population. Yet Jacobson and Mizik conclude that these returns are not statistically significant and that there is no evidence that stock returns from firms with strong customer satisfaction outperform the market over the long run. The failure to reject the null hypothesis is probably due to a lack of statistical power in Jacobson and Miziks analysis. We discuss why this is likely the case and then present new data updating the results from our original article [Fornell, C., S. Mithas, F. Morgeson III, M. S. Krishnan. 2006. Customer satisfaction and stock prices: High returns, low risk. J. Marketing70(1) 3--14]. The above-market returns persist and are both economically and statistically significant.

Service Failure Severity, Customer Satisfaction, and Market Share An Examination of the Airline Industry

The generally accepted view among managers and researchers is that the greater the severity of a service failure, the greater the resulting impact on customer satisfaction and business outcomes, such as lost customers and revenue. The research used to defend this viewpoint, however, does not typically address the severity of service failures, like those that result in injury or death (i.e., product-harm crises). This research addresses this issue by examining both minor incidents (i.e., failures that do not result in physical harm) and major incidents (i.e., failures that result in injury or death) in the U.S. airline industry, and the corresponding impact on the customer satisfaction and market share of the firms affected. Our results indicate that minor incidents are more strongly (negatively) related to future market share than are major incidents. Moreover, our findings indicate that only minor incidents are significantly linked to customer satisfaction. We argue that these findings occur for two reasons: First, most customers believe major incidents to be low probability events that are less salient when compared to more probable failures. Second, consumers impacted by major incidents most likely defect and are therefore not captured in future customer satisfaction surveys. Consequently, managers can delude themselves that things have “returned to normal” after a major incident when relying on customer satisfaction scores alone.

Stock Returns on Customer Satisfaction Do Beat the Market: Gauging the Effect of a Marketing Intangible

A debate about whether firms with superior customer satisfaction earn superior stock returns has been persistent in the literature. Using 15 years of audited returns, the authors find convincing empirical evidence that stock returns on customer satisfaction do beat the market. The recorded cumulative returns were 518% over the years studied (2000–2014), compared with a 31% increase for the S&P 500. Similar results using back-tested instead of real returns were found in the United Kingdom. The effect of customer satisfaction on stock price is, at least in part, channeled through earnings surprises. Consistent with theory, customer satisfaction has an effect on earnings themselves. In addition, the authors examine the effect of stock returns from earnings on stock returns from customer satisfaction. If earnings returns are included among the risk factors in the asset pricing model, the earnings variable partially mitigates the returns on customer satisfaction. Because of the long time series, it is also possible to examine time periods when customer satisfaction returns were below market. The reversal of the general trend largely resulted from short-term market idiosyncrasies with little or no support from fundamentals. Such irregularities have been infrequent and eventually self-correcting. The authors provide reasons why irregularities may occur from time to time.

Cross-National Differences in Consumer Satisfaction: Mobile Services in Emerging and Developed Markets

As firms attempt revenue growth through expansion into international markets, research on the potentially differential nature of consumer perceptions across national markets has become increasingly important. The authors advance the customer satisfaction literature by comparing customer perceptions in the wireless services industry across the national markets of Barbados, Singapore, Turkey, the United Kingdom, and the United States. This five-country context provides a unique opportunity for understanding how customers differ across markets because the data encompass consumers in disparate national markets (e.g., small/large, developing/developed, culturally heterogeneous) but include perceptions regarding a ubiquitous and increasingly commoditized service (wireless services). Focusing on emerging- versus developed-market comparisons, the findings provide important insights into unique differences in customer perceptions, including the greater importance of quality relative to value in influencing satisfaction in developed markets and the lesser importance of satisfaction in influencing customer loyalty in emerging markets.

Modeling Heterogeneity in the Satisfaction, Loyalty Intention, and Shareholder Value Linkage: A Cross-Industry Analysis at the Customer and Firm Levels

This study examines the relationship between customer satisfaction, loyalty intention, and shareholder value at the firm and individual customer levels. The authors also explore industry differences by using a multilevel and random-effects approach in which individual customer scores are nested within firm-level data and the estimated interrelationships are treated as random coefficients that are explained by industry characteristics. They compile a unique and detailed data set, which covers 10 years of information on 137 firms and includes a matched sample of 189,069 customers from multiple sources, such as the American Customer Satisfaction Index, the Center for Research in Security Prices, and Compustat, to yield three important insights. First, aggregate firm-level effects may overestimate the impact that satisfaction has at the individual customer level. Second, a consideration of loyalty intention or repurchase intention as the mediator can improve our understanding of the satisfaction–shareholder value relationship and the fact that this relationship can vary across firms. Finally, the influence of satisfaction and loyalty intentions on shareholder value varies by industry. The authors discuss implications of findings for researchers, managers, and investors.

An Abnormally Abnormal Intangible: Stock Returns on Customer Satisfaction

Sorescu and Sorescu (2016) and Bharadwaj and Mitra (2016) have made a number of insightful observations and suggestions for future research regarding stock returns on customer satisfaction. They have also provided a series of assessments of a study by Fornell, Morgeson, and Hult (2016) that focus on abnormal returns on customer satisfaction. Building on the original study, as well as the two commentaries and previous research, the studys authors argue that the published empirical evidence is quite consistent in favor of abnormal returns on customer satisfaction. These findings are also supported by the new analysis of Sorescu and Sorescu, who make several important contributions, not only regarding the persistence of abnormal returns over and beyond the technology sector but also with respect to the critical importance of industry classification in the context of customer satisfaction—something that definitely calls for more research attention. In fact, there are many avenues for future research on the economic and financial impact of customer satisfaction, as laid out in the commentaries, the authors’ original article, and this response.