Product Innovations, Advertising, and Stock Returns

Abstract

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. In particular, how do customer value creation (through product innovation) and customer value communication (through marketing investments) affect stock returns? This paper 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. We address these questions with a large-scale econometric analysis of product innovation and associated marketing mix in the automobile industry. First, we find that adding such marketing actions to the established finance benchmark model greatly improves the explained variance in stock returns. In particular, investors react favorably to companies that launch pioneering innovations, with higher perceived quality, backed by substantial advertising support, in large and growing categories. Finally, we quantify and compare the stock return benefits of several managerial control variables. Our results highlight the stock market benefits of pioneering innovations. Compared to minor updates, pioneering innovations obtain a seven times higher impact on stock returns, and their advertising support is nine times more effective as well. Perceived quality of the new-car introduction improves the firm's stock returns while customer liking does not have a statistically significant effect. Promotional incentives have a negative effect on stock returns, suggesting that price promotions may be interpreted as a signal of demand weakness. Managers may combine these return estimates with internal data on project costs to help decide the appropriate mix of product innovation and marketing investment.

The different roles of product originality and usefulness in generating word-of-mouth

“…Originality increases the buzz about a product, which can accelerate the diffusion of product knowledge in the market. This may explain why originality, "the buzz generator," is perceived to be so important, and leads to higher firm value in the eyes of shareholders (Srinivasan, Pauwels, Silva-Risso, & Hanssens, 2009). However, it is usefulness and not originality that determines the valence of WOM and may therefore lead to product success.…”

The role of organizational learning in stakeholder marketing

“…Additional innovator advantages include the preemption of scarce assets and the development of customer switching costs (e.g., Lieberman and Montgomery 1988). These advantages that innovators gain from executing innovative practices lead to superior performance outcomes (e.g., Rubera and Kirca 2012;Srinivasan et al 2009). This relationship between innovation and performance has been forwarded as a critical aspect of a market-oriented organization for quite some time (e.g., Han et al 1998;Hurley and Hult 1998).…”

Understanding the links between technological opportunism, marketing emphasis and firm performance: Implications for B2B

“…Marketing activities, among other things, help to create efficiency advantages, to promote cross-functional coordination and knowledge sharing, and to sense market insights that can lead to innovation and new products. Furthermore, marketing speeds acceptance of new products derived from technological opportunism, which then increases sales and potentially profits and market value (Robertson, 1993;Srinivasan, Pauwels, Silva-Risso, & Hanssens, 2009). These marketing activities are also critically important to many of the functions and processes within most firms (Goolsby, 1992).…”