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Regulatory Exposure of Deceptive Marketing and its Impact on Firm Value

Journal of Marketing, 2009

49 Pages Posted: 11 Sep 2009  

Martha Tipton

Martha Myslinski Tipton

Sundar G. Bharadwaj

University of Georgia--Terry School of Business; University of Georgia - C. Herman and Mary Virginia Terry College of Business

Diana Robertson

University of Pennsylvania - Legal Studies Department

Date Written: July 9, 2009

Abstract

Research linking marketing to financial performance has predominantly focused on how marketing assets and actions add value. We argue that it is equally important to understand how marketing decisions can destroy firm value. Prior research has indicated that negative events vary greatly in their indirect costs to the firm. Based on established theory and in-depth interviews with practitioners, we identify a set of factors that can explain the heterogeneity in the magnitude of indirect costs associated with negative marketing-related events. Specifically, we address how shareholder value is impacted by the regulatory exposure of deceptive marketing, which carries no direct cost to the firm. Using an event study, our analysis shows that incidents of exposed deceptive marketing are associated with significant negative abnormal returns amounting to a drop of 1%, which translates into an $86M wealth loss for the median-sized firm in our sample. In explaining the variation in magnitude of the impact between events, we find that event characteristics are generally more significant than firm and brand characteristics. When deception is highly egregious or directed at vulnerable populations, firm value is more negatively impacted than when the potential to mislead and harm is not readily verifiable. Furthermore, when the cited product has substantial brand market share, the levels of egregiousness and target audience explain substantially more of the variation in event impact than when brand market share is low. The results are robust to alternative stock portfolio-based measures of abnormal returns, model specification, heteroskedasticity, and examination of risk. Our framework and analysis have implications for Wall Street executives, Main Street managers, academic researchers, and public policy.

Keywords: Regulation, deceptive marketing, market value, FDA, DTC, event study

JEL Classification: C12, D21, I18, K42, L51, L65, M37

Suggested Citation

Tipton, Martha and Bharadwaj, Sundar G. and Robertson, Diana, Regulatory Exposure of Deceptive Marketing and its Impact on Firm Value (July 9, 2009). Journal of Marketing, 2009. Available at SSRN: https://ssrn.com/abstract=1431978

Martha Tipton (Contact Author)

Martha Myslinski Tipton ( email )

469 Bukit Timah Road
Singapore 912409
Singapore

Sundar G. Bharadwaj

University of Georgia--Terry School of Business ( email )

105 Brooks Hall
Athens, GA 30602
United States

University of Georgia - C. Herman and Mary Virginia Terry College of Business ( email )

Brooks Hall
Athens, GA 30602-6254
United States

Diana Robertson

University of Pennsylvania - Legal Studies Department ( email )

3730 Walnut Street
Suite 600
Philadelphia, PA 19104-6365
United States

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