Whose Customer Satisfaction Matters? — Evidence of Stock Returns from the Perspective of Industry and Competitors

Previous research has examined individual firm’s customer satisfaction and its impact on firm’s abnormal return on the stock market but found mixed results. This paper offers a new perspective for examining the link between customer satisfaction and short-term stock market reactions by considering two confounding factors – industry-level and rival’s customer satisfaction. Results show a significant positive relationship between firm’s customer satisfaction and focal firm’s abnormal return in a 5-day event window. However, this relationship is significantly weakened when adding industry average level of customer satisfaction and rivals’ customer satisfaction in the model, indicating that investors placed particular emphasis on industry benchmark and rivals’ customer satisfaction when evaluating focal firm’s customer satisfaction. In highly competitive industries, rivals’ growth in customer satisfaction has a stronger negative impact on focal firm’s abnormal return. When investors access more information about the focal firm, the impact of rivals’ growth in customer satisfaction on focal firm attenuates. The present study solves a puzzle in the literature and advances extant knowledge in evaluating the link between customer satisfaction and stock returns.