Drivers of the Cost of Capital : The Joint Role of Non-Financial Metrics

Recent studies in marketing suggest that non-financial metrics, such as customer satisfaction and brand value, help explain the variation in the cost of equity and cost of debt. These studies usually focus on only one non-financial metric and one component of capital cost. In this study, we broaden the understanding of the relevance of non-financial metrics for the cost of capital. We investigate the joint role of customer satisfaction, brand value, and corporate reputation for stock market beta and credit ratings, which reflect the variation in equity and debt risk premiums across firms. In addition to the joint direct influence of these metrics on capital cost, we also study their interaction effects. We develop a conceptual model to explain the effects on capital cost and test the resulting hypotheses in a broad sample of 344 firms from diverse industries in the period 1991-2006.Our results suggest that higher satisfaction ratings reduce both the cost of equity and cost of debt, whereas brand value and corporate reputation only show a negative direct association with cost of debt. In addition, both measures moderate the impact of satisfaction on cost of debt. Brand value attenuates the influence of satisfaction, while corporate reputation amplifies it