Do investments in intangible customer assets affect firm value?

•We model intangible customer asset investment.•We test whether measures derived from the model help explain firm value.•Per-customer revenue positively impacts value; more for low-growth firms.•Per-customer acquisition cost negatively impacts value; more for high-growth firms.

This paper develops a simple model of investment by service firms in intangible customer assets, and tests whether the model identifies some critical drivers of firms’ stock returns. Similar to firms with significant research and development (R&D) expenditures, we argue that firms in fast-growing service industries with few tangible assets can increase firm value by investing in customer acquisition and service (A&S) expenditure. Using a unique hand-collected data set, we show that per-customer changes in firms’ revenues, customer acquisition costs, and customer service costs help to explain their abnormal stock returns.