How Dissatisfied Customers and Short Sellers Can Break a Company
NEW RESEARCH BY ANATOLI COLICEV FINDS AN UNEXPECTED LINK BETWEEN MARKETING AND FINANCE: INVESTOR BEHAVIOR OF SHORT SELLERS, WHO BUY PRIVATE DATA ON CUSTOMER DISSATISFACTION AND SATISFACTION IN ORDER TO CHOOSE OR AVOID TARGETS. INTERESTINGLY, THE NEGATIVE EFFECT OF DISSATISFACTION IS 2.39 TIMES LARGER THAN THE POSITIVE EFFECT OF SATISFACTIONWhen we fill a customer satisfaction form, we can affect a company’s stock price, all the more so if we are dissatisfied. It’s not only that our satisfaction will sooner or later translate into repurchase and word of mouth, but also that sophisticated professional investors (short sellers) buy customer satisfaction data to bet on company’s stock. When customer satisfaction is high they avoid betting against the company while when dissatisfaction rises they bet against the target company, sending a strong, negative signal to the market.
In a study forthcoming in the Journal of Marketing Research, Anatoli Colicev (Assistant Professor at Bocconi Department of Marketing) and two co-authors analyze quarterly data from 273 firms over 2007–2017 and find that short seller activity is an important transmission route from customer satisfaction to stock prices.
The effects of satisfaction and dissatisfaction are not symmetric: a one-unit increase in customer satisfaction is associated with a .56 percentage point increase in abnormal returns, while a one-unit increase in customer dissatisfaction is associated with a 1.34 percentage point decrease. In other words, the value reduction due to customer dissatisfaction is 2.39 times larger than the value enhancement due to an increase in customer satisfaction.
Short sellers borrow a security they don’t own and sell it on the market, planning to buy it back later, hopefully at a lower price. It is a risky practice and usually the preserve of professional investors with the motivation for searching information not publicly available and not yet incorporated in a company’s stock price, the ability and financial means needed to obtain it, and the will to exploit such informational advantage. These investors usually work in large hedge funds with tons of resources which allow them to identify signal in multiple datasets. Since the market acknowledges their superior ability, their moves are monitored and processed as important indicators of future market trends.
Exploiting access to YouGov, a costly subscription-based database used by short sellers, the authors observe that when customer satisfaction unexpectedly decreases, short seller activity increases, causing a fall in a stock price and vice versa.
“The results provide board members of public companies with a persuasive argument for investing in customer satisfaction,” comments Professor Colicev. “and for paying particular attention to dissatisfaction. We found that 5.8% of the firms base executive compensation on improving customer satisfaction, but no company bases executive compensation on reducing customer dissatisfaction.”
For marketers, this is good news. It means that one of the primary marketing assets – customer satisfaction- is not only relevant for marketers but also for finance and professional investors.
“For regulators,” Prof. Colicev concludes, “our results support the call for mandating disclosure of customer satisfaction data in financial statements in order to level the playing field for all investors.”.
Professor Colicev has recently been appointed on the Editorial Review Board of the International Journal of Research in Marketing.
Ashwin Malshe, Anatoli Colicev, Vikas Mittal, “How Main Street Drives Wall Street: Customer (Dis)satisfaction, Short Sellers, and Abnormal Returns”, Journal of Marketing Research, first published October 21, 2020, DOI: 10.1177/0022243720954373.
by Fabio Todesco
