Assessing the Predictive Power of Customer Satisfaction for Financial and Market Performances: Price-to-Earnings Ratio is a Better Predictor Overall

Abstract

Our paper shows that based on the RMSE criteria, Price-to-Earnings ratio is a better predictor of financial and market performances of the firm than the Customer Satisfaction index (CS). This conclusion is based on the choice of five financial and seven market indicators that we consider as proxies for financial and market performances with a sample comprising eighty-six companies: Book value, dividend yield, Gross Profit Margin, Price to Cash-Flows, Price-to-Earnings, Price to Sales, Annual return, ROA, ROE, ROI, Volatility and Tobin’s Q. However, CS clearly outperforms our five benchmarks (Tobin’s Q, Price-to-Cash Flows, Price-to-Earnings, Volatility or the indicator itself) when forecasting Tobin’s Q, Volatility, ROE and ROI. In periods of volatile market such as year 2008, CS is a more stable predictor of Volatility or ROE than the indicators themselves (i.e. Volatility for Volatility, ROE for ROE). Keywords: Customer satisfaction; Financial performance; Market performance; Price-to-Earnings; Financial ratio; Market ratio    JEL Classifications: C15; C53; M31; M41; G17