A recently launched exchange traded fund strategy tries to capitalize on the theme of companies that do better by their customers will also do better in the markets.
For the U.S. analysis, the satisfaction scores for companies were related to actual stock portfolio returns from a fund trading on customer satisfaction information, the researchers wrote in a blog for the London School of Economics.
“We combined state-of-the-art methods from finance and economics (Fama and French 2015) with customer satisfaction theory from marketing (Fornell, Mithas, and Morgeson 2009),” Claes Fornell, Forrest Morgeson and Tomas Hult said. “The findings were nothing short of remarkable.”
According to the research paper, Stock Returns on Customer Satisfaction Do Beat the Market: Gauging the Effect of a Marketing Intangible, by Claes Fornell, Forrest V. Morgeson III and G. Tomas M. Hult, stock returns on customer satisfaction do beat the market, with the cumulative returns at 518% from 2000 to 2014, compared with a 31% increase for S&P 500 companies.
“We find a large, positive and significant ‘alpha,’ indicating above-market returns outside the realm of random chance. We also find that the effect of customer satisfaction on stock price is, at least to some degree, channeled via earnings surprises,” Claes Fornell, Forrest Morgeson and Tomas Hult said.
Basically, the research revealed customer satisfaction allows firms to outperform what many market observers believed would be the company’s near-term performance as traders react to information once made public.
“As suggested by the sheer size of the abnormal stock returns solely based on trading on customer satisfaction information, the reward for having satisfied customers is much greater than is generally known,” Claes Fornell, Forrest Morgeson and Tomas Hult said. “Customer satisfaction-based trading generates “excess” stock returns of about 10% per annum.”