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


Bell, David B; Ledoit, Olivier; Wolf, Michael (2013). A new portfolio formation approach to mispricing of marketing performance indicators with an application to customer satisfaction. Working paper series / Department of Economics 79, University of Zurich.

Abstract

The mispricing of marketing performance indicators (such as 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. 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 (such as 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. 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:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:G11, G12
Uncontrolled Keywords:Customer satisfaction, financial performance, long-short portfolio, mispricing, Preispolitik, Verbraucherzufriedenheit
Language:English
Date:December 2013
Deposited On:30 May 2012 17:28
Last Modified:12 Jul 2018 06:37
Series Name:Working paper series / Department of Economics
Number of Pages:26
ISSN:1664-7041
Additional Information:Revised version ; former title: "Reexamining possible mispricing of customer satisfaction"
OA Status:Green
Official URL:http://www.econ.uzh.ch/static/wp/econwp079.pdf
Related URLs:http://www.econ.uzh.ch/static/workingpapers.php

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