The Efficiency of Marketing and Stock Returns

Abstract

A firm’s marketing efficiency, the ability to optimally deploy and integrate different marketing inputs to achieve high sales revenue at low cost, is persistent. High marketing efficiency predicts better future operating performance and stock returns, especially in competitive industries. A marketing efficiency-based long-short portfolio strategy earns an average annual return of 5.16%, a substantial portion of which is earned over subsequent earnings announcements. The return predictability is stronger in stocks with higher valuation uncertainty and lower investor attention. The evidence suggests that investors underreact to the value-relevant, but hard to process, information embedded in marketing efficiency.

Keywords: Marketing efficiency, underreaction, return predictability, limited attention, fluency

JEL Classification: G12, G14, G10, M30