Customer Satisfaction and Equity Mispricing

Abstract

This paper analyzes the relationship between customer satisfaction and long run stock returns. An equally-weighted portfolio of 230 customer satisfaction score documented companies in American customer satisfaction index (ACSI) delivers a five factor alpha of 3.16% per year. The major economic explanation for this portfolio’s continuous outperformance is that the companies with high customer satisfaction exhibit a high future sale growth. These findings are consistent with word of mouth theory stating that positive word of mouth from highly satisfied customers would help firms penetrate new and existing markets and thus lead to high future sales.