The Unappreciated Value of Marketing: The Moderating Role of Changes in Marketing and R&D Spending on Valuation of Earnings Reports

MSI Working Paper #09-204

42 Pages Posted: 8 Jan 2009 Last revised: 5 Sep 2012

See all articles by Isaac M. Dinner

Isaac M. Dinner

Indeed

Natalie Mizik

University of North Carolina (UNC) at Chapel Hill; University of Washington

Donald R. Lehmann

Columbia University - Columbia Business School, Marketing

Date Written: March 25, 2009

Abstract

Because current earnings predict future financial performance, the stock market reacts strongly to earnings announcements. How rapidly and in what manner information about marketing actions and strategies is accounted for in the stock valuation is less clear. We examine the financial market's ability to fully and timely value marketing-related information released along with quarterly earnings announcements. We find evidence consistent with the market initially under-appreciating marketing and R&D effort. Specifically, we find differences in the immediate market response to earnings announcements for firms expanding versus reducing their marketing and R&D effort. However, we also observe a significantly greater positive stock price drift (i.e., systematic stock price adjustment) in the months following an earnings announcement for firms increasing marketing and/or R&D expenditures. We examine the dynamics and the mechanism underlying this differential drift. Firms increasing their marketing and/or R&D spending report significantly greater future operating performance than firms decreasing their marketing and R&D spending and the stock price adjustment (drift) accelerates around the time of the subsequent earnings announcement. Our findings suggest that the stock market takes time to fully incorporate implications of strategic marketing decisions. They also suggest the stock market tends to update firm valuation when the outcomes of marketing strategies are realized in future financial performance and new performance signals are sent to the market.

Keywords: Marketing Strategy, R&D, Marketing Metrics, Event Study, Post-Earnings-Announcement Drift

JEL Classification: M39, M49

Suggested Citation

Dinner, Isaac M. and Mizik, Natalie and Mizik, Natalie and Lehmann, Donald R., The Unappreciated Value of Marketing: The Moderating Role of Changes in Marketing and R&D Spending on Valuation of Earnings Reports (March 25, 2009). MSI Working Paper #09-204, Available at SSRN: https://ssrn.com/abstract=1324815 or http://dx.doi.org/10.2139/ssrn.1324815

Isaac M. Dinner (Contact Author)

Indeed ( email )

721 Domain Drive
Austin, TX 78758
United States

Natalie Mizik

University of Washington ( email )

Seattle, WA 98195
United States

University of North Carolina (UNC) at Chapel Hill ( email )

102 Ridge Road
Chapel Hill, NC NC 27514
United States

Donald R. Lehmann

Columbia University - Columbia Business School, Marketing ( email )

New York, NY 10027
United States

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