Customer Satisfaction and Implied Cost of Equity: Moderating Effects of Product Market Conditions and Chief Marketing Officer

Abstract

A handful of prior marketing studies have examined the impact of customer satisfaction (CS) on the cost of equity (COE). These studies have estimated the COE using the ex post proxy (e.g., stock market beta) that may be susceptible to market fluctuations. Going beyond the conventional COE approach, we thus reestimate the effect of CS on COE, measured by the more robust ex ante expected returns (implied cost of equity [ICE]). Furthermore, we examine whether this relationship is subject to both external (product market conditions) and internal (chief marketing officer [CMO] presence) factors. Using 753 firm-year observations in the period 2000–2014, we find that firms with high satisfaction ratings have lower equity financing costs. The significant moderating effects of product market conditions and the presence of a CMO in firms are also observed. The negative relationship becomes weaker under conditions of greater product market competition and demand uncertainty, but stronger when a firm has a CMO in its senior management. Our findings provide useful insights for managers who need to justify and refine their marketing strategies in respect of CS to acquire a firm’s required level of equity financing costs. In addition, we highlight the importance of CMOs as significant contributors to the COE reduction. The results are also useful for investors when valuing a firm through the COE.