The Unappreciated Value of Marketing

Download or read book The Unappreciated Value of Marketing written by Isaac M. Dinner and published by . This book was released on 2012 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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 Ramp;D effort. Specifically, we find differences in the immediate market response to earnings announcements for firms expanding versus reducing their marketing and Ramp;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 Ramp;D expenditures. We examine the dynamics and the mechanism underlying this differential drift. Firms increasing their marketing and/or Ramp;D spending report significantly greater future operating performance than firms decreasing their marketing and Ramp;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.