Customer Equity Sustainability Ratio: A New Metric for Assessing a Firm's Future Orientation

Securitization is a remarkable financial instrument; it enables securitizers to increase their short-term profits at the expense of the long-term value of their customer base. This ability might be tempting for firms, especially because it does not need to be disclosed transparently to stakeholders. The authors show how their newly developed customer equity sustainability ratio (CESR) complements customer equity reporting and creates more transparency about the consequences of securitization for future earnings and the riskiness of the underlying business model. Their model compares the future value of an existing customer base with current earnings. In an empirical study of 38 banks in ten countries, the authors demonstrate the limited transparency of long-term value creation in financial statements. Next, they outline the adequacy of CESR for creating more transparency in empirical cases of Countrywide Financial Corporation and nine firms from nonbanking industries. They recommend that marketing should play a prominent role in providing stakeholders with substantial information about the long-term value of the customer base.