Executive Summary
Research that links marketing to financial performance has predominantly focused on how marketing assets and actions add value. The authors posit that it is equally important to understand how marketing decisions can reduce firm value. Prior research has indicated that negative events vary greatly in their indirect costs to the firm. On the basis of established theory and in-depth interviews with practitioners, the authors identify a set of factors to explain the heterogeneity in the magnitude of indirect costs associated with negative marketing-related events. The article focuses on the financial value of negative events by examining deceptive marketing, a phenomenon that is pervasive in pharmaceutical and other industries. In particular, the subject of analysis is investors’ reaction to the exposure of a firm’s deceptive marketing by a regulatory agency, which carries no direct cost to the firm. Overall, the analysis shows a noteworthy loss of wealth to shareholders. Using an event study, the authors find that the average change in excess returns following a Food and Drug Administration citation was –1%. For Pfizer, whose market capitalization was $97.91 billion on June 7, 2009, this translated into a wealth loss of almost $1 billion. In addition to quantifying the financial market impact of the exposure of deception, the study identifies factors that constitute a substantial proportion of variation in negative events. The few studies on value-reducing events that have considered the variation in shareholder value between events have included only firm characteristics and largely have found them to be insignificant. This article shows that characteristics of the event explain much of the heterogeneity of the impact of negative events. Egregiousness of the violation and vulnerability of the target audience had significant, negative impacts on market value. Violations at levels of low egregiousness or unconfirmed egregiousness (i.e., unsubstantiated superiority claims) did not reduce estimates of future cash flows, whereas violations that were likely to lead to harm or increase medical costs were associated with significant, negative returns. The results also indicate that firms are penalized far more severely when deception is directed at consumers than when it is directed at physicians. Furthermore, when the cited product has substantial brand market share, the levels of egregiousness and target audience explain substantially more of the variation in event impact than when brand market share is low. The authors find similar results for cited brands with high rather than low advertising spending. Finally, the authors find that, in general, print media diminishes the negative impact of citations, whereas broadcast media is not significantly related to the impact of the citations on firm value. The results of this study will enable Main Street managers and Wall Street executives to make more informed decisions about the financial risk of potentially destructive marketing strategies. Managers and executives need to consider both the target audience and potential harm when communicating with outside stakeholders, as well as how these factors interact with brand market share and advertising spending.
Biography
Martha Myslinski Tipton joined the Lee Kong Chian School of Business, Singapore Management University, in 2009 after earning a PhD in Marketing from the Goizueta Business School at Emory University. Before her doctoral studies, Tipton earned a BA in Economics from Williams College. Her research interests include marketing strategy, the marketing–finance interface, innovation, and competitive reaction.
Sundar G. Bharadwaj is Associate Professor of Marketing in the Goizueta Business School at Emory University. His research has been published in Journal of Marketing, Journal of Marketing Research, Management Science, Information Systems Research, and Journal of the Academy of Marketing Science, among others. His research is conducted at the marketing strategy–financial performance interface, and his interests include innovation, brand and customer management cross-functional interactions, and customer solutions.
Diana C. Robertson is Professor of Legal Studies and Business Ethics in the Wharton School at the University of Pennsylvania. She previously served on the faculties of London Business School and Goizueta Business School, Emory University. Robertson holds an undergraduate degree from Northwestern University and an MA and PhD in Sociology from the University of California, Los Angeles. Her research centers on business ethics and has explored how salespeople and purchasing agents make decisions about ethical issues. Currently, Robertson is conducting research using neuroimaging technology to identify neural activations in the brain associated with sensitivity to moral issues. Robertson received the Albert E. Levy Scientific Research Award at Emory University in 2007 and was a finalist for the Journal of Marketing 2007 Harold H. Maynard Award. Her work has been published in Organization Science, Human Relations, Journal of International Business Studies, Sloan Management Review, Journal of Business Ethics, Business Ethics Quarterly, Journal of Marketing, and Neuropsychologia.
Journal of Marketing, Volume 73, Number 6, November 2009
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