Investments in Companies with High Customer Satisfaction Generate High Returns with Low Risk
New research using ACSI data shows that investments in firms with high customer satisfaction outperform the market.
ANN ARBOR, Mich.—Financial analysts and individual investors can benefit from considering how a firm treats its customers when evaluating and choosing stocks. Companies also can increase their market value of equity by better satisfying their customers.
In the lead article published in the January issue of the Journal of Marketing, a team of researchers led by Claes Fornell, the Donald C. Cook Professor of Business at the Stephen M. Ross School of Business at the University of Michigan, finds that investments based on customer satisfaction, as measured by the American Consumer Satisfaction Index (ACSI), produce excess returns while also reducing risk.
The findings affirm one of the most fundamental principles of capitalistic free markets—the connection between buyer utility and capital allocation—but challenge the conventional belief that assets producing higher returns also are associated with higher risk. It also demonstrated that the stock market is not efficient with respect to customer information.
Fornell and colleagues Sunil Mithas, Forrest Morgeson and M. S. Krishnan developed two stock portfolios, one back-tested paper strategy and one real-world case. Both portfolios consisted of firms with strong ACSI results. Non-ACSI related data and news coverage were excluded to ensure that the results of the study could be contributed solely to customer satisfaction.
Data analysis of the hypothetical portfolio shows that for the years 1996-2003, the ACSI portfolio delivered a return of 40 percent, compared to 21 percent for the Dow Jones Industrial Average and 13 percent for Standard & Poor's 500. Conversely, companies listed in the remaining 80 percent of ACSI scores saw a cumulative return of 20 percent.
The figures for the actual portfolio, covering the years 2000-2004, show a 75 percent return for the ACSI portfolio, compared to a 5 percent decrease for the Dow Jones and a 19 percent drop for the S&P. Similar to the hypothetical portfolio analysis, the beta (systematic) risk associated with these higher returns were lower than market.
On the basis of this evidence, the researchers conclude that although it takes a while for equity markets and consumer markets to exercise their joint power, they eventually get it right.
Companies may take comfort in that they will, sooner or later, be rewarded for treating customers well, but risk punishment for treating them poorly, they say. Investments that align capital with consumer utility provide high returns at low risk and contribute to making markets more efficient.
About the ACSI
The American Customer Satisfaction Index is a national economic indicator of customer evaluations of the quality of products and services available to household consumers in the United States. It is updated each quarter with new measures for different sectors of the economy replacing data from the prior year. The overall ACSI score for a given quarter factors in scores from about 200 companies in 40 industries, and from government agencies over the previous four quarters.
The index is produced by the University of Michigan's Ross School of Business in partnership with the American Society for Quality and CFI Group, and is supported in part by ForeSee Results, corporate sponsor for the e-commerce and e-business measurements, and by Market Strategies Inc., a major corporate contributor.
Written by Adrienne Losh
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