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.

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