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Customer Franchise—A Hidden, Yet Crucial, Asset

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  • Massimiliano Bonacchi
  • Kalin Kolev
  • Baruch Lev

Abstract

We introduce a measure of customer franchise value for subscription†based companies—a fast growing and vital sector of the economy. This measure is based on information voluntarily disclosed by some, but not all, firms. Controlling for self†selection, we examine the measure's information content and find that customer value is significantly positively associated with stock price and this association is incremental to both GAAP and a set of non†GAAP variables typically considered in valuation tests. Furthermore, we show that the customer value measure is positively associated with future earnings and analysts' forecast errors. Importantly, we find that the documented results are robust to controlling for the individual inputs used to derive the measure, highlighting the need to consider the interaction between stand†alone value drivers in assessing a firm's performance. These findings indicate that the proposed measure of customer value is an important valuation tool that quantifies and summarizes the main trends and factors underlying the performance of subscription†based enterprises. This study informs researchers and investors, as well as accounting policymakers, about a major value†generating asset currently missing from corporate financial reports.

Suggested Citation

  • Massimiliano Bonacchi & Kalin Kolev & Baruch Lev, 2015. "Customer Franchise—A Hidden, Yet Crucial, Asset," Contemporary Accounting Research, John Wiley & Sons, vol. 32(3), pages 1024-1049, September.
  • Handle: RePEc:wly:coacre:v:32:y:2015:i:3:p:1024-1049
    DOI: 10.1111/1911-3846.12095
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    Cited by:

    1. Pei, Duo & Vasarhelyi, Miklos A., 2020. "Big data and algorithmic trading against periodic and tangible asset reporting: The need for U-XBRL," International Journal of Accounting Information Systems, Elsevier, vol. 37(C).
    2. Claudia Arena & Simona Catuogno & Nicola Moscariello, 2021. "The unusual debate on non-GAAP reporting in the current standard practice. The lens of corporate governance," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 25(3), pages 655-684, September.
    3. Daniel Minh McCarthy & Elliot Shin Oblander, 2021. "Scalable Data Fusion with Selection Correction: An Application to Customer Base Analysis," Marketing Science, INFORMS, vol. 40(3), pages 459-480, May.
    4. Matsuoka, Kohsuke, 2021. "A framework for variance analysis of customer equity based on a Markov chain model," Journal of Business Research, Elsevier, vol. 129(C), pages 57-69.
    5. Hui Feng & Neil A. Morgan & Lopo L. Rego, 2020. "The impact of unprofitable customer management strategies on shareholder value," Journal of the Academy of Marketing Science, Springer, vol. 48(2), pages 246-269, March.
    6. Kohsuke Matsuoka, 2020. "Exploring the interface between management accounting and marketing: a literature review of customer accounting," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 31(3), pages 157-208, September.
    7. Warren Maroun & Wayne van Zijl & Rottok Chesaina & Robert Garnett, 2022. "The Beautiful Game: Fair Value, Accountability and Accounting for Player Registrations," Australian Accounting Review, CPA Australia, vol. 32(3), pages 334-351, September.

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