Product Innovations, Advertising, and Stock Returns

By Shuba Srinivasan, Koen Pauwels, Jorge M. Silva-Risso, Dominique M. Hanssens. 2009

450 citations recorded by the source corpus.

Under increased scrutiny from top management and shareholders, marketing managers feel the need to measure and communicate the impact of their actions on shareholder returns. In particular, how do customer value creation (through product innovation) and customer value communication (through marketing investments) affect stock returns? This article examines, conceptually and empirically, how product innovations and marketing investments for such product innovations lift stock returns by improving the outlook on future cash flows. The authors address these questions with a large-scale econometric analysis of product innovation and associated marketing mix in the automobile industry. They find that adding such marketing actions to the established finance benchmark model greatly improves the explained variance in stock returns. In particular, investors react favorably to companies that launch pioneering innovations, that have higher perceived quality, that are backed by substantial advertising support, and that are in large and growing categories. Finally, the authors quantify and compare the stock return benefits of several managerial control variables. The results highlight the stock market benefits of pioneering innovations. Compared with minor updates, pioneering innovations have an impact on stock returns that is seven times greater, and their advertising support is nine times more effective as well. Perceived quality of the new car introduction improves the firm's stock returns, but customer liking does not have a statistically significant effect. Promotional incentives have a negative effect on stock returns, indicating that price promotions may be interpreted as a signal of demand weakness. Managers can combine these return estimates with internal data on project costs to help decide the appropriate mix of product innovation and marketing investment.

Subfields: Accounting, Finance, Management Science and Operations Research

View Paper: https://www.semanticscholar.org/paper/5f4b0fad939d0a706d0875115e36d540e7a0bba1

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Citations in the corpus

Stock Market Reaction to Green Vehicle Innovation (2013, background): “…new product innovation in general is deemed an essential activity for companies to build and sustain their competitive advantage (Dougherty 1992, Holak and Lehmann 1990, Leonard-Barton 1992, Montoya-Weiss and Calantone 1994, Nonaka and Takeuchi 1995, Souder 1987, Srinivasan et al. 2009).”
Firm Innovativeness and Its Performance Outcomes: A Meta-Analytic Review and Theoretical Integration (2012, background): “…and provides substantially higher customer benefits relative to existing products in the industry (Chandy and Tellis 1998) Pioneer innovation (e.g., Srinivasan et al. 2009) Exploratory innovation (e.g. Jansen, Van den Bosch, and Voldberda 2006) Breakthrough innovation (e.g., Sorescu and Spanjol…”
Marketing and Firm Value: Metrics, Methods, Findings, and Future Directions (2009, unknown): “Srinivasan et al. (2009) (weekly) Table 2 DEPENDENT FINANCIAL METRICS FOR ASSESSING INVESTOR RESPONSE First, there is the issue of temporal aggregation of the data, which may be different for both the dependent variable (e.g., daily price changes) and the independent variables (e.g., monthly…”
On the value relevance of customer satisfaction. Multiple drivers and multiple markets (2012, methodology): “sustainable revenue streams in the long run, which are rewarded by investors (Srinivasan et al. 2009).”
Absorptive capacity, innovation, and financial performance (2011, background): “First, due to shifting customer demands and impulsive consumer preferences, organizations that introduce innovative products with advanced features and capabilities, are more likely to remain up to date and achieve higher levels of sales and firm growth (Bayus et al., 2003; Srinivasan et al., 2009).”
Asymmetric Roles of Advertising and Marketing Capability in Financial Returns to News: Turning Bad into Good and Good into Great (2013, background): “Schwarz et al. (1991) suggest that advertising may make negative news more easily retrievable and thus more salient.”
Exploring the relationship between corporate social responsibility and firm innovation (2014, background): “New product innovations can be radical/pioneering or incremental (Srinivasan et al. 2009).”
Consumer innovativeness and its correlates: A propositional inventory for future research (2011, background): “Despite constant developments in product design and marketing, most new products fail (Srinivasan et al., 2009).”