Executive Summary
Under increased scrutiny from top management and shareholders, marketing managers feel the need to measure and communicate the impact of their actions on shareholder returns. Although the consumer response effects of marketing are well researched, a better understanding is needed of marketing’s impact on investor response, which is typically measured by stock returns. Investors are motivated by cash flow expectations—in particular, the prospect of enhancing and accelerating future cash flows and of reducing associated risks. Moreover, many marketing actions are costly, and investors consider both their (expected) benefits and downsides. Furthermore, the stock return impact of marketing actions needs to be assessed in the presence of other important drivers identified in the accounting and finance literature.
In this article, the central research question is, To what extent do marketing actions improve stock returns, over and above the typical finance and accounting benchmark measures? This article examines, conceptually and empirically, how product innovations and marketing investments for such product innovations lift stock returns by improving the outlook on future cash flows. The authors postulate several hypotheses in this regard, centered on the role of marketing mix in enhancing, accelerating, and stabilizing cash flows for the firm and/or increasing its residual value. They test these hypotheses using stock return response modeling on six years of weekly automotive data.
The empirical findings suggest that new product introductions have positive postlaunch effects on stock returns. These effects are stronger in larger, high-growth categories. In addition, the stock return benefits of pioneering (new-to-the-market) innovations are seven times larger than those that are merely new to the company. This finding contrasts with the reality that managers favor the rollout of frequent incremental innovations over that of fewer, more fundamental innovations. Furthermore, the marketing of these innovations plays an equally important role. The authors find that the stock return impact of new product introductions is higher when they are backed by substantial advertising investments. In other words, communicating the differentiated added value to consumers yields higher firm value effects of innovations, especially for pioneering innovations. In contrast, promotional incentives do not increase firm value effects of new product introductions, because they may signal an anticipated weakness in demand for the new product. Finally, the stock return impact of new product introductions is higher for innovations with higher levels of perceived quality.
Biography
Shuba Srinivasan is Associate Professor of Marketing in the School of Management at Boston University. She obtained her PhD in Marketing from the University of Texas at Dallas and has been a visiting research scholar at the University of California, Los Angeles, and Associate Professor of Marketing in the A. Gary Anderson Graduate School of Management at the University of California, Riverside. Recently, the University of California, Riverside, named her a University Scholar for a three-year period. Her research estimates return on marketing investment and long-term marketing productivity using time-series techniques and econometric methods. Her current research focuses on marketing’s impact on financial performance and firm valuation, marketing metrics, decomposing demand effects of radical innovations, and the effects of direct-to-consumer advertising from a shareholder’s perspective in the pharmaceutical industry. Her research won the 2001 EMAC best-paper award. Her research has been published or is forthcoming in Journal of Marketing Research, Marketing Science, Management Science, Journal of Marketing, International Journal of Research in Marketing, and Harvard Business Review, among others.
Koen Pauwels is an associate professor at Ozyegin University and in the Tuck School of Business at Dartmouth College. He won the 2007 O’Dell award for the most influential article in Journal of Marketing Research and was finalist for the 2008 Bass and Little awards at Marketing Science. Koen built his research insights in industries ranging from automobiles and pharmaceuticals to business content sites and fast-moving consumer goods. Current research projects include the predictive power of market dashboard metrics, performance turnaround strategies, and retailer product assortment and price wars. Professor Pauwels received his PhD in Management from the University of California, Los Angeles; won the EMAC 2001 best-paper award; and publishes in Harvard Business Review, Journal of Marketing, Journal of Marketing Research, Journal of Retailing, Management Science, and Marketing Science. He serves on the editorial boards of International Journal of Research in Marketing, Journal of Marketing, Journal of Marketing Research, and Marketing Science.
Jorge Silva-Risso is Associate Professor of Marketing in the A. Gary Anderson Graduate School of Management at the University of California, Riverside. His research interests include econometric models of consumer response to marketing efforts, marketing effectiveness, and the effects of the Internet on consumer behavior. Jorge’s recent research has focused on the automobile industry, in which he has implemented models for planning and evaluating pricing and promotions decisions. His work has been published in American Economic Review, Journal of Marketing Research, Marketing Science, Journal of Econometrics, and Journal of Marketing, and other journals in business and economics. Jorge won the 1995 Clayton Dissertation Award from the Marketing Science Institute, the 2006 Marketing Science Practice Prize, and the 2007 Paul Green best-paper award, and he was a finalist for the 2007 INFORMS Edelman Award. He holds a PhD in Management (1996) and an MBA (1991) from the University of California, Los Angeles.
Dominique M. Hanssens is the Bud Knapp Professor of Marketing in the Anderson School of Management at the University of California, Los Angeles. From 2005 to 2007 he served as executive director of the Marketing Science Institute in Cambridge, Mass. A PhD graduate of Purdue University, his research focuses on strategic marketing problems—in particular, marketing productivity—to which he applies his expertise in econometrics and time-series analysis. Professor Hanssens serves or has served as an area editor for Marketing Science and an associate editor for Management Science and Journal of Marketing Research. His research has appeared in the leading academic and professional journals in marketing, economics, and statistics. Four of these articles have won best-paper awards from Marketing Science (1995, 2001, 2002) and Journal of Marketing Research (1999, 2007), and five others were award finalists. The second edition of his book with Leonard Parsons and Randall Schultz, titled Market Response Models, was published in 2001 and was translated into Chinese in 2003. He is also the 2007 recipient of the AMA Churchill Lifetime Achievement Award.
Journal of Marketing, Volume 73, Number 1, January 2009
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