Aggressive Marketing Strategy Following Equity Offerings and Value: The Role of Relative Strategic Flexibility

Abstract

Firms raise significant amount of funds and gain competitive advantage over their rivals through equity financing, namely initial public offerings (IPOs) and seasoned equity offering (SEOs). The authors find that both IPO and SEO firms adopt a more aggressive marketing strategy during the two years following their offering. However, not all equity issuers benefit equally from increased marketing spending, which can help signal companies’ growth prospects to investors. A key moderator of the link between marketing investment and firm value is strategic flexibility of rivals with respect to issuers. In particular, the stock market reacts favorably to an aggressive marketing strategy initiated by issuers competing against rivals with relatively less flexibility, whereas increased marketing expenditures do not translate into higher firm value when rivals have higher flexibility. Furthermore, the authors show that marketing expenditures create value within context: the role of marketing in enhancing shareholder value and the moderating effect of rivals’ strategic flexibility are more pronounced in the two-year window immediately following an equity offering than at any other time. Implications for theory and practice are discussed.

Keywords: marketing-finance interface, marketing resources, financial market performance, equity offerings, strategic flexibility, signaling