Nav: Home

Research finds reason advertising boosts stock prices for some companies and not others

January 13, 2016

BLOOMINGTON, Ind. -- By 2017, total advertising spending is expected to approach $136 billion, placing more pressure on management to demonstrate its impact on sales and stock prices. It's the age-old question of advertising effectiveness.

While nearly every research study has found that advertising has a positive impact on sales, the results are mixed regarding its effectiveness on stock price, which can be seen as an indicator of future sales.

New research from professors at the Kelley School of Business at Indiana University, the McCombs School of Business at the University of Texas and the W. P. Carey School of Business at Arizona State University found the reason advertising boosts stock prices for some companies and not others.

They found that companies that set out to differentiate themselves through brand equity and thus create intangible firm value benefit more from advertising than firms that simply set out to become cost leaders.

"They're both very valid strategies. Different companies choose different approaches. They both can be very successful for companies," said Niket Jindal, an assistant professor of marketing at Kelley.

"Advertising can increase awareness; it can increase sales regardless," he added. "But it's only for those companies that have a differentiation strategy where advertising's going to build up brand equity ... and shareholder value.

"That's not to say that it's wasteful spending for those cost leaders; there's still value in that it's increasing their sales. But those kinds of companies shouldn't expect to see an impact beyond the current year's sales."

The paper, "Advertising Effectiveness: The Moderating Effect of Firm Strategy," has been accepted for publication by the Journal of Marketing Research. Co-authors are Leigh McAlister and Raji Srinivasan, marketing professors at the McCombs School, and Albert Cannella Jr., a management professor at the Carey School.

Chances are you've heard of companies that have a differentiation strategy; they are popular brands. It makes sense to suggest that companies which are cost leaders are far less visible in consumers' minds and may include commodities firms, manufacturers and budget retailers that focus on squeezing out costs.

Beginning in 1994, publicly traded companies were required by the Securities and Exchange Commission to report advertising expenditures that are considered "material," something under the law that is significant to users of a registrant's financial statements. Before then, all firms had to report advertising expenditures.

McAlister, Srinivasan, Jindal and Cannella decided to review financial statements before and after the implementation of accounting regulation FRR44 (SEC Financial Reporting Release No. 44), when over half of the companies stopped disclosing advertising expenses.

The researchers looked at reports for S&P 500 companies in 1990-94 and 1996-2009

The researchers predicted that companies with a differentiation strategy would disclose costs associated with marketing, because it was "fundamentally central to their strategy." Obviously, shareholders would be interested in this information as well.

They predicted and found that for firms operating with a cost leadership strategy, shareholders would build their intangible market-based assets through mechanisms other than advertising.

"These are not inferior firms by any means. They are really healthy firms, but the role of marketing in these firms is a very different thing," Jindal said.

For example, business-to-business firms such as aircraft maker Boeing develop such assets through their selling organizations, not advertising. Tech firms develop assets through research and development rather than through advertising.

"We're not saying that cost leaders are the poor stock performers," Jindal said. "They can add great stock price. What we're saying is advertising isn't going to have any impact on that stock price."

Their paper also has important application for those evaluating marketing offers at various firms and for consultants wishing to target firms with a strong marketing emphasis. It also has ramifications for marketing education.

"Most marketing textbooks, when introducing the marketing career path, overlook the implications of a firm's business strategy," the authors wrote. "The marketing function is frequently presented as the growth driver, with budgetary authority and a clear path to general management that one might expect in a firm that differentiates.

"If, in fact, marketing is only cast in the role of a growth driver in that 40 percent of publicly traded firms that differentiate, some students may find themselves in firms that are cost leaders where marketing responsibilities and career opportunities of the marketing job that they accept differ significantly from the responsibilities and career opportunities that their marketing textbooks lead them to expect."
-end-
For a copy of the paper, contact George Vlahakis at IU Communications at 812-855-0846 or vlahakis@iu.edu.

Indiana University

Related Advertising Articles:

Leicester academics argue sexualised drinks advertising undermines anti-rape campaigns
Academics examined the effectiveness of a rape prevention campaign in bars and nightclubs in Liverpool.
New tool to show advertising revenue generated by each Facebook user
Researchers at Universidad Carlos III de Madrid, as part of a European research project, have developed a new software tool which allows Facebook users to visualize the advertising revenue they generate while browsing in this online social network.
Cornell Tech grads' receive major technology award for revolutionizing video advertising
Cornell Tech graduates have launched a software startup called Uru that uses computer-vision technology to automatically find blank surfaces inside video -- a desk, a wall, even a plain T-shirt -- that can host advertisements that are unobtrusive and unblockable.
It pays to go beyond the last word when advertising using Google AdWords
A forthcoming article in the INFORMS journal Marketing Science compares advertising strategies based on last touch and first touch keyword effectiveness metrics and finds that while the return on investment of a last touch strategy is 5 percent more than a first touch strategy, a strategy based on weighting the two metrics improves ROI by another 5 percent.
Research letter examines cancer center advertising spending
Total spending on advertising to the public by 890 cancer centers in the United States was $173 million in 2014, according to an article published online by JAMA Internal Medicine.
More Advertising News and Advertising Current Events

Best Science Podcasts 2019

We have hand picked the best science podcasts for 2019. Sit back and enjoy new science podcasts updated daily from your favorite science news services and scientists.
Now Playing: TED Radio Hour

Anthropomorphic
Do animals grieve? Do they have language or consciousness? For a long time, scientists resisted the urge to look for human qualities in animals. This hour, TED speakers explore how that is changing. Guests include biological anthropologist Barbara King, dolphin researcher Denise Herzing, primatologist Frans de Waal, and ecologist Carl Safina.
Now Playing: Science for the People

#534 Bacteria are Coming for Your OJ
What makes breakfast, breakfast? Well, according to every movie and TV show we've ever seen, a big glass of orange juice is basically required. But our morning grapefruit might be in danger. Why? Citrus greening, a bacteria carried by a bug, has infected 90% of the citrus groves in Florida. It's coming for your OJ. We'll talk with University of Maryland plant virologist Anne Simon about ways to stop the citrus killer, and with science writer and journalist Maryn McKenna about why throwing antibiotics at the problem is probably not the solution. Related links: A Review of the Citrus Greening...