| Does customer satisfaction level affect bid-ask spread? It is an important question to investors, market makers, researchers and other constituents of stock markets. But there is a void in the extant literature about it. This study therefore aims to shed light on the question.;In this study, the hypotheses that higher customer satisfaction levels will lead to smaller bid-ask spreads in stock markets are proposed and tested. The hypotheses are based on the argument that a higher level of customer satisfaction would insure a firm against downward shift in future cash flows. This is because satisfied customers will return and may even purchase more. As a result of steadier cash flows, the information asymmetry of these firms will become lower, which in turn implies a narrower bid-ask spread of their stocks.;With a sample of 2,144 firm-year observations in the period from 1994 to 2008, the testing of the hypotheses is based on quoted spread and effective spread, since both measures are commonly employed in the literature. A log-linear pooled regression model is specified with a number of control variables. The control variables include share price, volatility of share returns, trading volume, firm size, dummy variable for inclusion in S& P 500 index, institutional ownership, number of analysts following, firm age, market to book, profitability, leverage, dummy variables for industry and dummy variables for year. The regression results confirm the hypotheses.;To check the validity of the above results, a series of robustness tests are carried out. These tests include: (1) tests for omission of correlated variables (2) tests for alternative regression models and (3) out-of-sample test. These robustness tests confirm the validity of the hypotheses. The internal validity of the theoretical model employed is also validated by further tests. |
