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A new portfolio formation approach to mispricing of marketing performance indicators: an application to customer satisfaction


Bell, David R; Ledoit, Olivier; Wolf, Michael (2014). A new portfolio formation approach to mispricing of marketing performance indicators: an application to customer satisfaction. Customer Needs and Solutions, 1(4):263-276.

Abstract

The mispricing of marketing performance indicators (e.g., brand equity, churn, and customer satisfaction) is an important element of arguments in favor of the financial value of marketing investments. Evidence for mispricing can be assessed by examining whether or not portfolios composed of firms that load highly on marketing performance indicators deliver excess returns. Unfortunately, extant portfolio formation methods that require the use of a risk model are open to the criticism of time-varying risk factor loadings due to the changing composition of the portfolio over time. This is a serious critique as the direction of the induced bias is unknown. As an alternative, we propose a new method and construct portfolios that are neutral with respect to the desired risk factors a priori. Consequently, no risk model is needed when analyzing the observed returns of our portfolios. We apply our method to a frequently studied marketing performance indicator, customer satisfaction, and using various ways of measuring customer satisfaction, we do not find any convincing evidence that portfolios that load on high customer satisfaction lead to abnormal returns.

Abstract

The mispricing of marketing performance indicators (e.g., brand equity, churn, and customer satisfaction) is an important element of arguments in favor of the financial value of marketing investments. Evidence for mispricing can be assessed by examining whether or not portfolios composed of firms that load highly on marketing performance indicators deliver excess returns. Unfortunately, extant portfolio formation methods that require the use of a risk model are open to the criticism of time-varying risk factor loadings due to the changing composition of the portfolio over time. This is a serious critique as the direction of the induced bias is unknown. As an alternative, we propose a new method and construct portfolios that are neutral with respect to the desired risk factors a priori. Consequently, no risk model is needed when analyzing the observed returns of our portfolios. We apply our method to a frequently studied marketing performance indicator, customer satisfaction, and using various ways of measuring customer satisfaction, we do not find any convincing evidence that portfolios that load on high customer satisfaction lead to abnormal returns.

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Additional indexing

Item Type:Journal Article, not refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Uncontrolled Keywords:Customer satisfaction, financial performance, long-short portfolio, mispricing
Language:English
Date:December 2014
Deposited On:20 Jan 2015 15:44
Last Modified:05 Apr 2016 18:49
ISSN:2196-291X
Publisher DOI:https://doi.org/10.1007/s40547-014-0028-6
Related URLs:http://dx.doi.org/10.5167/uzh-62713

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