Product Innovations, Advertising and Stock Returns

Journal of Marketing, January 2009

47 Pages Posted: 25 May 2008

See all articles by Shuba Srinivasan

Shuba Srinivasan

Boston University - Questrom School of Business

Koen H. Pauwels

Ozyegin University

Jorge M. Silva-Risso

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management

Dominique M Hanssens

University of California, Los Angeles (UCLA) - Anderson School of Management

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.

Keywords: Marketing investments, innovations, advertising, stock returns, stock-return response modeling

Suggested Citation

Srinivasan, Shuba and Pauwels, Koen H. and Silva-Risso, Jorge M. and Hanssens, Dominique M, Product Innovations, Advertising and Stock Returns. Journal of Marketing, January 2009. Available at SSRN: https://ssrn.com/abstract=1136319

Shuba Srinivasan (Contact Author)

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States
6173535978 (Phone)
6173534098 (Fax)

HOME PAGE: http://smgnet.bu.edu/mgmt_new/profiles/SrinivasanShuba.html

Koen H. Pauwels

Ozyegin University ( email )

Kusbakisi Cd. No: 2
Altunizade, Uskudar
Istanbul, 34662
Turkey

HOME PAGE: http://www.marketdashboards.com

Jorge M. Silva-Risso

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management ( email )

Riverside, CA 92521
United States

Dominique M Hanssens

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
310-825-4497 (Phone)
310-206-7422 (Fax)

HOME PAGE: http://www.anderson.ucla.edu/faculty/dominique.hanssens/

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