Capital Market Returns to New Product Development Success: Informational Effects on Product Market Advertising

Abstract

The authors seek to answer the question: if the capital market reacts with abnormal stock returns to new product development success events, do these returns influence subsequent marketing decisions? Drawing on informational market feedback and managerial learning theories, the authors posit that when firms are uncertain about how responsive the product market will be to their marketing activities, signals received from the capital market help them update their beliefs about the responsiveness. After decomposing the abnormal returns at the new drug approval event into components that can and cannot be predicted by the firm (i.e., predicted and unpredicted abnormal returns), the authors find that the post-approval advertising budget is larger when unpredicted abnormal approval returns are higher. Further, this tendency is more pronounced for detailing spending than for direct-to-consumer (DTC) advertising. Consistent with these higher budgets, the authors find that post-launch advertising effectiveness is better as unpredicted abnormal approval returns are higher, particularly for detailing (versus DTC). Overall, this study suggests that information flows from the capital market’s initial perceptions at new product introduction play an important role in subsequent marketing decisions in the product market.

Keywords: unpredicted abnormal event returns; unpredicted consumer demand; advertising budget; advertising effectiveness; persistence modeling

JEL Classification: G10; G14; G31; G37