Customer Franchise: A Hidden, Yet Crucial Asset
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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.