This study examines the effects of customer satisfaction on analysts' earnings forecast errors. Based on a sample of analysts following companies measured by the American Customer Satisfaction Index (ACSI), we find that customer satisfaction reduces earnings forecast errors. However, analysts respond to changes in customer satisfaction but not to the ACSI metric per se. Furthermore, the effects of customer satisfaction are asymmetric; for example, analysts are more willing to use good news (i.e. an increase in customer satisfaction information) than bad news (i.e. a decrease in satisfaction). Similarly, customer satisfaction reduces negative deviation more than positive deviation of the analysts' forecasts from actual earnings. Furthermore, the effects of customer satisfaction depend upon the base level of satisfaction that the firm has achieved. Finally, the effects of customer satisfaction on analysts' forecast errors differ across firms with volatile satisfaction scores and those with stable satisfaction scores. We discuss the implications of our results for marketers and participants in financial markets.
