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14 January, 2016

New Research Shows Why Advertising Lifts Some Company Stock Prices And Not Others

Nearly every research study shows that advertising has a positive impact on sales, but results are mixed when it comes to its effectiveness on stock prices, often an indicator of future sales.

But new paper ‘Advertising Effectiveness: The Moderating Effect of Firm Strategy’ from the Kelley School of Business at Indiana University claims to have the answer.

The study has found companies that set out to differentiate themselves through brand equity, and as a result create intangible company value, often benefit more from advertising than companies who set their sights purely on becoming cost leaders.

“They’re both very valid strategies. Different companies choose different approaches. They both can be very successful for companies,” an assistant professor of marketing at Kelley Niket Jindal said.

“Advertising can increase awareness; it can increase sales regardless. But it’s only for those companies that have a differentiation strategy where advertising’s going to build up brand equity … and shareholder value.

“That’s not to say that it’s wasteful spending for those cost leaders; there’s still value in that it’s increasing their sales. But those kinds of companies shouldn’t expect to see an impact beyond the current year’s sales.”

It makes sense to suggest that companies who are cost leaders are far less visible in consumers’ minds and may include commodities firms, manufacturers and budget retailers that focus on squeezing out costs.

The researchers predicted that companies with a differentiation strategy would disclose costs associated with marketing, because it was “fundamentally central to their strategy”. Obviously, shareholders would be interested in this information as well.

And as it turns out, for firms operating with a cost leadership strategy, shareholders tend to build their intangible market-based assets through mechanisms other than advertising.

“These are not inferior firms by any means. They are really healthy firms, but the role of marketing in these firms is a very different thing,” Jindal said.

For example, business-to-business firms such as aircraft maker Boeing develop such assets through their selling organisations, not advertising. Tech firms develop assets through research and development rather than through advertising.

“We’re not saying that cost leaders are the poor stock performers,” Jindal added. “They can add great stock price. What we’re saying is advertising isn’t going to have any impact on that stock price.”

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