Why Do Firms Invest in Consumer Advertising with Limited Sales Response? A Shareholder Perspective

Abstract

Marketing managers increasingly recognize the need to measure and communicate the impact of their actions on shareholder returns. This study focuses on the shareholder value effects of pharmaceutical direct-to-consumer advertising (DTCA) and direct-to-physician (DTP) marketing efforts. Although DTCA has moderate effects on brand sales and market share, companies invest vast amounts of money in it. Relying on Kalman filtering, the authors develop a methodology to assess the effects from DTCA and DTP on three components of shareholder value: stock return, systematic risk, and idiosyncratic risk. Investors value DTCA positively because it leads to higher stock returns and lower systematic risk. Furthermore, DTCA increases idiosyncratic risk, which does not affect investors who maintain well-diversified portfolios. In contrast, DTP marketing has modest positive effects on stock returns and idiosyncratic risk. The outcomes indicate that evaluations of marketing expenditures should include a consideration of the effects of marketing on multiple stakeholders, not just the sales effects on consumers. Recent research has demonstrated that a firm's advertising affects stock returns, beyond the effect of advertising on revenues and profits (e.g., Joshi and Hanssens 2010). Similarly, communicating the added value created by product innovation yields greater firm value effects (e.g., Srinivasan et al. 2009). As McAlister, Srinivasan, and Kim (2007) report, a firm's advertising also lowers its systematic market risk. Consequently, to evaluate marketing expenditures properly and improve marketing resource allocations, models that consider the effects of marketing expenditures on multiple stakeholders, such as customers and investors, are necessary (e.g., Luo 2007). KeywordsIn this study, we examine the influence of advertising expenditures on investors and thus (1) the levels of stock returns and the risk associated with these returns, distinguishing (2) systematic (market risk factor) and (3) idiosyncratic (firm-specific) risks. Our framework also moves beyond the theories and variables used in previous studies to determine whether firms should invest in marketing actions with limited sales response. In doing so, this study offers new contributions over previous research (e.g., Joshi and Hanssens 2010;McAlister, Srinivasan, and Kim 2007). In particular, we simultaneously estimate the effects of marketing on all three components of shareholder value using Kalman filtering. Building on the four-factor model that Carhart (1997) proposes, we develop a dynamic model to relate pharmaceutical direct-to-consumer advertising (DTCA) and direct-to-physician (DTP) marketing expenditures to stock returns and volatilities while controlling for financial performance.Pharmaceutical DTCA is a relatively new, and heavily debated, phenomenon: The Food and Drug Administration (FDA) relaxed regulations on DTCA only in 1997. Recent research suggests limited short-and long-term effects of DTCA on sales, which places pharmaceutical marketers, simil...

Attracting Investor Attention through Advertising

“…The starting year of the sample is determined by the availability of advertising spending 7 See, for example, Rao and Bharadwaj (2008); ;Srinivasan, Pauwels, Silva-Risso, and Hanssens (2009);Joshi and Hanssens (2010) ;Osinga, Leeflang, Srinivasan, and Wieringa (2011).…”

Patient Empowerment: Consequences for Pharmaceutical Marketing and for the Patient–Physician Relationship

“…More precisely, in a large meta-analysis of 58 studies on the effectiveness of pharmaceutical promotional investments across several therapeutic categories, Kremer et al (2008) found an average elasticity of 0.326 for detailing, 0.123 for direct-to-physician advertising, and only 0.073 for DTCA. Apart from their direct effect on sales, promotional efforts, such as DTCA, Total World Market, Constant $ using Q410 average exchange rates may bring positive effects on other performance variables like stock returns or systematic risk (Osinga et al 2011). However, I argue that now is the time to move beyond these channels (direct-to-physician marketing and DTCA) and actively explore new direct-to-patient channels.…”

“…11 The academic literature on DTCA is extensive, and my goal here is to complement this literature with an overview of the effects of patient empowerment on DTCA, especially given the regulatory limitations of such communication. I refer the reader to excellent papers providing in-depth summaries of the literature on DTCA, such as Iizuka and Jin (2005), Kolsarici and Vakratsas (2010), Narayanan et al (2004) and Osinga et al (2011). 12 Available at http://www.ema.europa.eu.…”

Consumer Complaints and Company Market Value

“…Under these circumstances, an increase in complaint level may not necessarily be harmful to company market value, given the savings generated by not fulfilling the specific needs of these customers. In the effort to reduce significant negative effects, it is important to verify whether the company, in promoting products and services, has not created excessive expectations that will lead to future dissatisfaction (Osinga et al, 2011). Consumers perceive the product value on the basis of what the company's promises are, thereby seeking satisfaction over the long term.…”

“…There has been a need to establish better metrics to measure how different marketing strategies affect a company's market value (Mintz & Currim, 2013;Srinivasan & Hanssens, 2009) and a growing trend has arisen where financial indicators are increasingly being applied to previous studies (Anderson, Fornell, & Mazvancheryl, 2004;Fang, Palmatier, & Steenkamp, 2008;Goldenberg et al, 2007;Luo & Homburg, 2008;Osinga, Leeflang, Srinivasan, & Wieringa, 2011). Lehman (2004) emphasizes that practitioners who want to be involved in the important decisions their businesses make should seek consistent links between strategies and financial indicators, in particular, those related to increasing shareholder value.…”