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Journal of Marketing 

When Marketing Strategy First Meets Wall Street: Marketing Spendings and Firms' Initial Public Offerings 

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Published 9/1/2008 

Author: Xueming Luo 

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Executive Summary
How can marketing help create firm shareholder value? Recent research on marketing–finance interface has shown that marketing spendings (i.e., expenses in communications, market research, advertising, and other marketing efforts) matter financially after firm stocks are traded publicly. The current article ponders this issue rather differently and in an innovative way. It addresses the value of marketing spendings when “marketing strategy first meets Wall Street”—that is, at the time firm stocks first become traded publicly in the context of initial public offerings (IPOs).

The results from a large-scale, cross-industry study indicate that firms’ pre-IPO marketing spendings help reduce IPO underpricing and boost IPO trading in the stock market. The econometric models also suggest that these effects are heterogeneous—that is, more salient for firms with higher cost reduction efficiency and in markets with a smaller number of historical IPOs.

To theory, the findings are important in three ways. First, they expand the substantive domain of market-based assets and customer equity by ushering in a “greenfield” of IPOs. In this way, the article uncovers fresh IPO-based reasons marketing can help create shareholder value. Second, the findings help build a more powerful framework of market-based assets by appreciating the value relevance of marketing before IPOs because most prior studies have valued market-based assets after IPOs. Third, they show the ability of a market-based asset framework to help solve some intriguing puzzles like IPO underpricing; that is pre-IPO marketing spendings (a significant marketing variable omitted in previous finance models) may help certify IPO values and reduce information asymmetry. As such, coupled with prior research, this article boosts the power of market-based assets theory to explain stock market responses both before and after IPOs.

To practice, this article builds the case for not cutting marketing before an IPO. Executives should allocate capital to marketing programs in fostering market-based intangibles for improved fundamental outlook (superior cash flows) before IPOs to attract investors and cultivate healthy IPOs. Perhaps, marketers should, and can, start thinking like investors and speaking the same language of finance. By using such language with underpricing and trading of IPOs, this study helps marketers joint in the conversation with investors. Although IPOs have two enemies—uncertainty and volatility—the good news is that marketing can help reduce these risks insofar as company fundamentals are boosted by pre-IPO marketing spendings. In addition, this good news goes a long way, especially when firms have superior operating efficiency compared with their rivals. Indeed, with lean and shrinking budgets, marketers are often pressured to cut corners and achieve the same goals with fewer resources. This research suggests that marketers can meet this challenge and get more bang for the buck from their marketing expenses, based on more effective marketing spendings and more efficient operations. Thus, prudent investors may be better able to pick “star” IPOs if they can track pre-IPO marketing spendings and model firm cost reduction efficiency simultaneously.

Biography
Xueming Luo is Eunice & James L. West Distinguished Professor and Associate Professor of Marketing in the College of Business Administration at the University of Texas at Arlington. His research focuses on econometric modeling, strategic marketing, and international marketing/business. His work has appeared in academic and practitioner journals such as Journal of Marketing, Journal of Marketing Research, Marketing Science, Journal of the Academy of Marketing Science, International Journal of Research in Marketing, Journal of International Marketing, Journal of Business Research, Journal of Advertising Research, Industrial Marketing Management, and Journal of Consumer Psychology.

Journal of Marketing, Volume 72, Number 5, September 2008
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