Article Do Service Guarantees Guarantee Greater Market Value? Jeffrey Meyer 1 , Dwayne D. Gremler 1 , and Jens Hogreve 2 Abstract Service guarantees are an important feature of many service offerings because consumers recognize greater risk associated with the purchase of services than with the purchase of goods. Despite substantial service guarantee research in the past two decades though, no extant study has examined the return on service guarantee investments. To fill this gap, the authors examine the effect of a service guarantee on a firm’s market value by identifying new service guarantee announcements, then using these announce- ments as events in an event study. The results show that simply offering a service guarantee does not result in greater market value, as measured by a change in stock market returns, for the offering firm. Instead, the market value of a service guarantee depends on its scope and the process required to invoke the guarantee. In particular, service guarantees that are specific in scope or automatically invoked lead to significantly greater market value than unconditional or customer-invoked guarantees, respectively. In addition, these differences are moderated by firm size. From a theoretical point of view, this study extends signaling theory to explain the differential effects of service guarantees, depending on their design. Keywords service guarantee, signaling theory, market value, event study, service guarantee design, return on marketing In October 1989, Hampton Inn hotels issued a press release announcing an industry-first ‘‘100% satisfaction guarantee.’’ If guests were not completely satisfied with their stay, Hampton Inn did not expect them to pay. Perhaps not surprisingly, Hampton Inn introduced this guarantee about a year after a groundbreaking article on service guarantees by Hart (1988). Since then, manage- rial practice shows increasing uses of service guarantees to differ- entiate a firm from competitors (Wirtz and Kum 2004), yet empirical research on the value of service guarantees has not kept pace. Studies address the design of service guarantees and their effects on consumers and firms, but firms offer service guarantees mainly because they expect a positive influence on their bottom line (Ostrom and Hart 2000). Hampton Inn’s guarantee appears to have been extremely successful by financial measures: It increased revenues by $7 million in the first year and $18 million in the second year (Ostrom and Hart 2000). Apart from such anec- dotal evidence though, ‘‘no published research has addressed the return on service guarantee investments’’ (Hogreve and Gremler 2009, p. 337). Considering the demand for organizations to justify their service investments and the increased research emphasis on demonstrating returns on marketing investments (Kunz and Hogreve 2011; Ostrom et al. 2010), the lack of information about ways to confirm the financial success of service guarantees is a clear gap in service literature. It also prompts our basic research question: Do service guarantees have a positive effect on the market value of the offering firm? To address this issue, we examine the effect of service guaran- tees on a firm’s actual market value by estimating the economic impact of offering a service guarantee based on the change in the stock market returns for the firm. Ostensibly, firms offering ser- vice guarantees aim to attract and satisfy customers by offering a recovery mechanism in the event of a service failure. Although stock market returns result from investor, not customer, behavior, efficient financial markets reflect how changes in a firm’s offer- ings affect customers’ evaluations of the firm. Thus, if investors believe that a service guarantee attracts and satisfies customers enough that it outweighs the costs of implementing such a guaran- tee, it will be reflected in a greater market value of the firm. Exist- ing research has demonstrated that a guarantee’s design affects consumers’ perceptions of and how they value a service guarantee; thus, we also examine the effect of specific service guarantee design elements on the market value of the offering firm. In considering the effect of service guarantee designs on firm performance, we focus on the scope of the guarantee as well as the process of invoking it. The scope refers to whether the service guarantee covers only specific aspects of the service 1 Department of Marketing, College of Business, Bowling Green State Uni- versity, OH, USA 2 Catholic University of Eichstaett-Ingolstadt, Ingolstadt School of Manage- ment, Ingolstadt, Germany Corresponding Author: Jeffrey Meyer, Department of Marketing, College of Business, Bowling Green State University, Bowling Green, OH 43403, USA. Email: jdmeyer@bgsu.edu Journal of Service Research 2014, Vol. 17(2) 150-163 ª The Author(s) 2013 Reprints and permission: sagepub.com/journalsPermissions.nav DOI: 10.1177/1094670513505359 jsr.sagepub.com