Download The impact of stock price on marketing decision variables

Greta Kingola
The impact of stock price on marketing decision
variables
Masterarbeit im Fach Marketing
Themensteller: Prof. Dr. Marc Fischer
Vorgelegt in der Masterprüfung im Studiengang Betriebswirtschaftslehre
der Wirtschafts- und Sozialwissenschaftlichen Fakultät der Universität zu Köln
Greta Kingola
Tööstuse 47a-4, 10416 Tallinn, Estland
[email protected]
Martrikelnummer: 5625750
Prüfungsnummer: 33412
Abgabedatum: 16.02.2015
Köln 2015
Table of Contents
List of tables .............................................................................................................................. II!
List of figures ........................................................................................................................... III!
List of symbols and abbreviations ............................................................................................ IV!
1! Introduction .......................................................................................................................... 1!
2! Theoretical fundamentals ..................................................................................................... 4!
2.1! Definition of main concepts .......................................................................................... 4!
2.1.1! Stock price .............................................................................................................. 4!
2.1.2! Marketing decision variables ................................................................................. 6!
2.1.2.1! Product ............................................................................................................ 7!
2.1.2.2! Price ................................................................................................................. 7!
2.1.2.3! Place ................................................................................................................ 8!
2.1.2.4! Promotion ........................................................................................................ 9!
2.1.3! Relation of stock price and marketing decision variables .................................... 10!
2.2!!!Framework on the impact of stock price on marketing decision variables .................. 13!
2.2.1! Causes for the impact ........................................................................................... 13!
2.2.2! Short-term impact ................................................................................................. 18!
2.2.3! Medium and long-term impact ............................................................................. 20!
3! Discussion of empirical findings on the impact of stock price on marketing decision
variables ................................................................................................................................... 23!
3.1! Short- and long-term effect of stock price on marketing decision variables .............. 23!
3.1.1! Effect on product .................................................................................................. 24!
3.1.2! Effect on price ...................................................................................................... 28!
3.1.3! Effect on place ...................................................................................................... 32!
3.1.4! Effect on promotion ............................................................................................. 34!
3.2! Factors influencing the impact of the stock price ....................................................... 40!
3.2.1! Organizational factors .......................................................................................... 40!
3.2.2! Environmental factors .......................................................................................... 43!
4! Evaluation and implications ............................................................................................... 43!
4.1! Evaluation.................................................................................................................... 45!
4.2! Implications for the management and other stakeholders ........................................... 47!
5! Conclusion .......................................................................................................................... 48!
References ................................................................................................................................ 51!
Appendix .................................................................................................................................. 58!
Eidesstattliche Versicherung .................................................................................................... 60!
Curriculum Vitae ...................................................................................................................... 62!
II
List of Tables
Table 1 Overview of promotion mix elements......................................................................... 10!
Table 2 Summary of key findings on the impact of stock price on different marketing decision
variables ........................................................................................................................... 37!
Table 3 Factors influencing the magnitude of the impact ........................................................ 44!
III
List of Figures
Figure 1 Factors influencing stock prices ................................................................................ 11
Figure 2 Composition of S&P 1500 CEO compensation packages in 1993-2010................... 15!
Figure 3 Answers to the question: Near the end of the quarter, it looks like your company
might come in below the desired earnings target. Within what is permitted by GAAP,
which of the following choices might your company make?........................................... 19
Figure 4 The effect of a 20% price decline on revenues and sales…………………………...31
Figure 5 Use of display promotions among brands with different strength…………………..36
IV
List of Symbols and Abbreviations
BIC – Bonus and incentive compensation
CFO – Cash flow from operations
COGS – Cost of goods sold
CRSP – Centre for Research in Securities Prices
EPS – Earnings per share
GAAP – Generally Accepted Accounting Principles
I/B/E/S – Institutional Broker’s Estimate System
LBO – Leveraged buyout
NWOM – Negative world of mouth effects
RM – Real activities manipulation
SG&A – Selling, general and administrative expenses
SEO – Seasoned equity offering
Pr – Probability
! – Cumulative distribution function is standard normal distribution
!! – Portfolio return
!!! – Return on a 30-day Treasury bill
!! – Return on a value weighted portfolio of all stocks
SMB – Large and small capitalization portfolio return difference
HML – High and low book to market portfolio return difference
MOM – Past high and low portfolio return difference
! !"#$%&'()%$# – Dummy variable for the case a sale occured during a price promotion
QuarterEnd – Dummy variable for the case a sale occurred at the end of companies financial
quarter
YearEnd – Dummy variable for the case a sale occurred at the end of companies financial
MissedPriorQEPS – Dummy variable for the case the company missed its EPS benchmark
from the previous year
JustBeat – Dummy variable for the case the company achieved consensus analyst forecast for
the quarter
CFO – Cash flow from operations
A – Total assets
S – Sales during the year
V
∆!! – Sales increase from previous year to the current one
PROD – Production costs, which is the sum of cost of goods sold and inventory growth in one
year
SIZE – Logarithm of market value of equity
MTB – Market-to-book ratio
SUSPECT_NI – Suspect firm years
R – Return of the company minus industry average return
I – Interaction of the returns of the company (shows continuity in returns)
DistributionControl – Control variable for level of distributional change in previous two years
Compet – Distributional changes of top competitor in previous years
∆!"#ℎ!– Change in cash flows
ROA – Return on assets
!"# – Forecasted ROA
Mktg – Marketing expenditures
!"#$ – Forecasted marketing expenditures
AF – Analysts forecast
SURP – earnings surprise
REVYE – pre-fiscal year-end forecast revision
REVPE – post-fiscal year-end revision
1
1 Introduction
“Marketing is not the art of finding clever ways to dispose of what you make. Marketing is the
art of creating genuine customer value. It is the art of helping your customers become better
off.” Philip Kotler (2003, xii)
During the last decades, marketers as well as researchers have been challenged to substantiate
the benefits of marketing activities and justify their costs for the company. As it is difficult,
when not impossible, to measure the change in consumers’ perceptions and preferences due to
marketing activities and their direct contribution to companies’ financial performance, a body
of research has focused on the visible financial gain of marketing instead. The focus of many
marketing-finance interface researches has been on the contribution that marketing makes to
firm value and how it impacts the stock price of the company.
Researchers have found a variety of explanations, among which two types of impacts are
more dominant. Firstly, marketing activities influence companies’ financial performance, including their revenues and costs. By varying marketing decision variables, such as pricing
strategies, executives can impact short-term sales quantities and the resulting revenues. Secondly, as underlined by research, unexpected marketing activities made visible to the stock
market, like new product introductions or agreements for celebrity endorsements, have the
power to signal superior performance and strength of the company’s future cash flows to the
stock market.
The reverse effect, however – the impact of the stock price on a company’s marketing decision variables – has gained only little empirical attention until this point. And yet, as the stock
price of a publicly traded company achieves constant interest from various stakeholders and
incorporates both investors’ expectations towards the company as well as serves as a signal of
management strategy success to executives, the stock price has an evident role in managerial
decision-making. Investors’ expectations, in particular, may place management under great
performance pressure, due to which strategic choices known to be rewarded by the stock market may occasionally be preferred to those, which would support superior long-term financial
performance for the company.
It is particularly the short-sightedness of such decisions that has found criticism in academic
literature. Influenced by the stock market and its expectations, ambition to meet and beat
market forecasts may lead to changes in real activities, especially in fields not completely
transparent to stakeholders outside the company. Research and development – and in the recent decade, also marketing – are the areas, to which reference is made the most.
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The matter as to how the stock price and its possible developments impact marketing decision
variables is of practical importance, as marketing is directly responsible for the cash flows the
company achieves from its operations. The change of marketing decision variables due to
managements’ short-term focus or lack of resources caused by misfortune on the stock and
capital market directly impacts the financial situation of the company, as well as its assets
such as customer and brand equity, which constitute the foundation of company earnings. It is
relevant at this point, however, that under stock market incentives, marketing activities are
managed less from the customer perspective, which has gained much credit in marketing literature over recent years, but more from the company’s financial perspective. As a result, the
focus is more on the financial gain the company receives from marketing activities and signals those activities send to the stock market, and less on optimal customer satisfaction
through offering consistent superior customer value.
This stock-market-lead approach, in light of the customer perspective, is somewhat troubling
as it shifts the focus away from customer satisfaction and the long-term customer relationship,
which, according to many marketing specialists, should be the sole purpose of the marketing
department. On the other hand, success on the capital market offers monetary gains for greater
investment opportunities into customer relationship management programs. It also enhances a
better firm reputation in general. In summary, stock results of the company are highly connected with company’s success on the product market.
In view of the above, the goal of this thesis is threefold. First of all, the aim of this work is to
theoretically motivate and discover, if and why the stock price of the company has an impact
on companies’ marketing decision variables. The matter of investors’ expectations was already mentioned, but there is also an additional stimulus in the form of executives’ personal
gain from favorable stock prices, which motivates managers to take notice of the course of the
stock price. Secondly, this thesis seeks to explore how the stock price of the company impacts
different marketing decision variables, taking into account both financial metrics as well as
stakeholders’ expectations, which jointly, among additional factors, affect the course of stock
performance. Thirdly, and most importantly, the goal of this paper is to summarize empirical
results of previous research on the impact of stock price on marketing decision variables in
order to show how marketing decision variables are altered in response to stock market incentives.
Therefore, alongside the practical importance of the topic, this thesis is also theoretically relevant by providing an integrative summary on previous work contributing to the impact of
stock price on different marketing decision variables. As far as is known to the author, this is
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the first attempt to provide such an overview of specific impacts on marketing actions, systemized by different marketing decision variables.
To reach these goals, this thesis is divided into five parts. After introduction, the work proceeds with a chapter on theoretical fundamentals. In the first part of this chapter, definitions
and explanations to the main concepts are provided and, thereafter, rounded up with an overview of the interrelations between the stock price and marketing decision variables. In the
second part, the theoretical framework regarding the impact of stock price on marketing decision variables is provided, focusing on a variety of aspects which have an effect on the impact
of the stock price’s importance and role in managerial decision making and therefore on strategic marketing decisions. At the end of the chapter, a differentiation is made between shortterm and medium- to long-term impacts of the stock price on marketing decision variables
and its effects on company performance.
The third chapter focuses on previous empirical research and findings on the impact of stock
price on marketing decision variables. Successively, evidences on the impact of stock price on
all marketing decision variables, identified in the second chapter, are provided. Together with
results, methods used by researchers in their works are also presented in more detail. In the
second part of the third chapter, organizational and environmental factors influencing the impact of the stock price on marketing decision variables are discussed to provide an overview
of possible reasons why stock price may impact some companies and decisions of their management more than others.
The thesis continues in the fourth chapter with an evaluation and systematization of the empirical findings. The controversy of some results is discussed in light of possible shortcomings
in previous research and the most frequent changes in marketing decision variables due to
stock prices are assessed. Thereafter, managerial implications driven from this theoretical
work are provided, along with implications on stakeholders and investors.
The last chapter offers a summary of the key findings on the impact of stock price on marketing decision variables. Starting with a review of the company and its management’s motivation to consider incentives resulting from the stock market in their marketing decisions, the
chapter resumes with examples on marketing actions that companies have undertaken in accordance with prior research, due to the impact of stock price. Thereupon, possible consequences of such decision are presented and discussed. The chapter, and thereby the thesis,
closes with suggestions for future research.
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2 Theoretical fundamentals
In order to understand the relation of stock price and marketing decision variables, and, above
all, how the first impacts the latter, it important to understand the concepts behind both stock
price and marketing decision variables. The the framework and causal relationships between
the concepts can thereby be detected and analyzed further with the attempt to reveal causes
for certain marketing decisions motivated by the stock price, and their impacts in the short as
well as in the long-term.
2.1 Definition of main concepts
The following chapter provides definitions to the main concepts. The importance of stock
price as a metric for companies’ success is motivated through background literature, which is
followed by an overview of different marketing decision variables in more detail. The remainder of the section deals with the relationship of stock price and marketing decision variables and offers insights to the marketing-finance interface focusing on findings on marketing
contributions to the firm value and the company’s stock price.
2.1.1 Stock price
Determining the performance of a company is of constant great importance for many stakeholders of the company. However, depending on the stakeholder, performance, or rather the
success of the company, can be understood differently. While customers may be interested
mainly in new product introductions, product quality, brand strength and confidence in customer relationship management, executives may, on the other hand, be interested in increased
employee satisfaction or increased market share. In brief, the performance metric is subject to
the interests of the current stakeholder.
However, as the ultimate goal of each publicly traded company should be to maximize the
wealth of its owners, the shareholders (Damodaran, 2001, 11; Rappaport, 1998, 2f), and so the
maximization of the current price of the existing shares (Ross, Westerfield, Jordan, 2006, 9),
the performance measurement should be first and foremost linked to this dimension. The
company’s success at increasing the wealth of the shareholder is at best reflected by the stock
price of the company (Damodaran, 2001, 12), which is often regarded as the key measure of
company performance (Rappaport, 1998, 2f; Doyle, 2000, 3).
The stock price of a firm shows the firm’s success on the stock market and investor’s confidence towards the future success of the company to bring in new cash flows (Damodaran,
2001, 142). Likewise, it demonstrates the ability of executives to manage the company successfully in a changing market environment (Doyle, 2000, 15). The trading activity is caused
5
by the difference in investors’ assessments. In a continuous market, stock price develops from
the equilibrium of sell and buy orders – in case of excess demand for a particular stock, transactions are likely to go through with higher prices, raising the average price of the stock and
vice versa (Damodaran, 2001, 142).
Although there is no unambiguous method to determine the future course of the stock price,
there are several factors, underlined by research, which impact the course of the stock price.
Firstly, technical factors like trading volume and market breadth impact the direction and
magnitude of stock price movements (Shim, Siegel, 2007, 202). However, as technical factors
are market-related factors, evaluating past stock movement patterns and not a company’s own
intrinsic value nor its performance (Bhat, 2008, 336f), these factors are not analyzed deeper in
the current paper.
Secondly, fundamental factors, which evaluate the company’s financial statement through
measures like earnings per share, earnings growth rate, revenue (sales) growth, cash flow
(Graham, Harvey, Rajgopal, 2005, 20), return on equity, debt level, and ratios and dividends
(Khan, Zuberi, 1999, 87) help to determine whether the stock is correctly priced or not (Shim,
Siegel, 2007, 202) and thus whether it is worth buying or selling. Most frequently, the importance of earnings and corresponding metrics (e.g. EPS, E/P) are emphasized both by practitioners as well as by researchers (e.g. Dechow, Kothari, Watts, 1998, 134) regardless of its
shortcomings, such as a variety of accounting methods and ignorance regarding the time value
of money (Rappaport, 1998, 14; Doyle, 2000, 26f; Degeorge, Patel, Zeckhauser, 1999, 1).
Public companies must report their quarterly earnings four times a year. The stock market,
including analysts and investors, closely follow whether the company has managed to
meet/beat the earnings benchmarks, including achieved profits (avoided reporting losses),
kept previous performance level and met analysts’ earnings forecasts made during the year
(Degeorge, Patel, Zeckhauser, 1999, 1) (see Appendix 1). If this is not the case, even small
negative surprises can signal substantial performance decline and management incompetence
to investors (Athanasakou, Strong, Walker, 2009, 5), which the stock market tends to punish
with abruptly falling stock prices (Srinivasan, Hanssens, 2009, 293). These are caused by
large-scale selling and can result in short-term stock undervaluation (Hotchkiss, Strickland,
2003, 1470).
Thirdly, investor sentiment towards the company is shaped by positive and negative surprises
that become known to the stock market, which can come in the form of single incidents (e.g.
the stock price of Malaysian Airways dropped substantially after the accidents in 2014) or
longer-lasting trends (e.g. the Dotcom Bubble in the late 90s).
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Fundamental factors, like the earnings of the specific period, are influenced through activities
of the company and decisions made by the management board. Further, this paper rests on the
suggestion that executives can, through various actions, manipulate both the earnings flow
(Mizik, 2010, 595) as well as provoke certain positive events, like new product introductions
or novel marketing tactics (Srinivasan, Pauwels, Silva-Risso, Hanssens, 2009, 36). These may
be embraced by the stock market as positive surprises and may therefore have a positive effect on the stock price. One of these categories that influences fundamental factors like earnings per share significantly is marketing, which will be discussed next.
2.1.2 Marketing decision variables
Marketing is seen as one of the key areas, which is responsible for generating profitable revenue streams (Kotler, 1999, 2) and creating shareholder value as it supports the creation of
companies’ competitive advantage. Competitive edge is responsible for the attraction and
retention of paying customers (Doyle, 2000, 18) together with continuous satisfaction promises (Kotler, Armstrong, Harris et al., 2013, 4). It comprises a range of activities, which can be
summarized under the major functions of marketing (Weiss, 2008, 86), also known as the
marketing mix. Marketing mix elements jointly offer the best satisfaction to customers and
are responsible for the on-going and sustainable customer relationship building and management process (Kotler, Armstrong, Harris et al., 2013, 5).
The optimal choice of different marketing decision variables also creates and shapes marketing assets like customer equity including its three drivers: value equity, retention equity and
brand equity. Value equity incorporates the objective calculation of the customer about the
truthful value of the purchased product or service, which is done by determining optimal
product attributes. Brand equity, in other hand, focuses on the intangible or subjective value,
which is obtained through acquisition of the product or through collaboration with the company and which is greater than the mere sum of product attributes. The drivers encompass
customer brand awareness, customer attitude towards the brand and customer perception of
brand ethics, all of which are strongly influenced by marketing decision variables and need a
uniform and sustainable long time contribution of the firm to build up. The latter is also true
for retention equity, which describes the strength of the relationship between the customer and
the company, along with repeated purchase intention, which similarly is a result of optimal
mix of marketing decision variables. (Rust, Zeithaml, Lemon, 2000, 53 fff)
The creation of customer equity is achieved through long-term continuous customer satisfaction and retention, which in turn is a result of, for example, right price-quality ratio, communication strategy (Vogel, Evanschitzky, Ramaseshan, 2008, 100, 104), pricing decisions of the
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product portfolio, service quality and convenience (Rust, Lemon, Zeithaml, 2004, 113, 118).
In summary, choosing and undertaking optimal marketing activities around all of the marketing mix elements is essential for being able to sell the products, building brand preference
among customers and creating as well as sustaining revenue streams.
In this paper, the dependence and relation of marketing decision variables from the stock
price is examined, with marketing decision variables understood identically to the definition
by American Marketing Association: marketing decision variables are decision variables,
which “correspond to the major marketing functions that influence revenue and profit. They
are summarized in the well-known four P's: product, price, promotion, and place (distribution)” (https://www.ama.org/resources/Pages/Dictionary.aspx?dLetter=D, 15.09.14). Following, the four P’s are explained in more detail as they each cover a broad area of marketing.
2.1.2.1 Product
Product related variables include decisions about product development, its quality, branding,
packaging, labelling, customer (after) service, product line and product mix (Kotler, 1983).
The term product does not only imply tangible offerings to customers, but also includes all
possible intangible services and combinations of them both. As products are the key elements,
which lay the fundamental offering for the customer, marketing-mix planning often starts
with finding the right product, which offers value to the target group and is the basis for a
profitable customer relationship (Kotler, Armstrong, Harris et al., 2013, 238f). Equally important is the timing of the launch of the new product, which can ensure competitive advantages (Song, Benedetto, Zhao, 1999, 811) and greater revenues (Radas, Shugan, 1998,
301) to the company. Individual product decisions, like product quality, are good positioning
tools for marketers (Kotler, Armstrong, Harris et al., 2013, 244), but in addition to the questions when and to whom should the company sell the products, the quantity plays an important role as well (Borden, 1984, 7). While varying the production quantity, companies are
able to manage production costs and unit costs, which in turn are taken into account very seriously when prices for the products are determined (Noble, Gruca, 1999, 436, 453).
2.1.2.2 Price
The price of the product is regarded as one of the most important factors affecting the buyers’
choice while choosing the suitable product (Kerin, Peterson, 2004, 427). It is also one of the
most flexible and easily adjustable marketing mix elements (Kerin, Peterson, 2004, 434), as it
is quicker for the company to change the price of the product than, for instance, product attributes. Changing the price of the product may have prompt effects on sales and revenue, as
8
price is the only element in the marketing mix that produces revenue as a source of income
(Dubois, Jolibert, Mühlbacher, 2007, 388) and hence affects market share and profitability of
the company directly (Kotler, Armstrong, Harris et al., 2013, 305).
However, while adjusting prices, the price elasticity of demand and so the price sensitivity of
the consumers should be considered with care. Price elasticity of demand is the change in
quantity demand in relation to the change in price (see formula 1). For example, in case the
customers of a certain product are very sensitive to price changes, even a slight price adjustment upward may have significant setbacks on firm’s earnings due to lost sales. On the other
hand, a small decrease in price can result in increased sales. In general, price elasticity of
greater than one is considered as elastic demand, in which case the demand is sensitive to
price changes (Ferrell, Hartline, 2010, 242). In case price elasticity is smaller than one, the
opposite holds.
!"!"#!!"#$%&'&%(!!"!!"#$%& =
!"#$"%&'("!!ℎ!"#$!!"!!"#$%&%'!!"#$%&
!"#$"%&'("!!ℎ!"#$!!"!!"#$%
(1)
Source: Ferrell, Hartline, 2010, S. 242
In addition to price elasticity of demand, also competitors and their price setting activities
must be kept in mind when prices are changed. The price of the product is one of the most
transparent attributes of the offering, which, now more than ever, can easily be compared over
different brands and market places for example via special price comparison websites (Lambin, 2008, 139).
Among final price setting, price related variables include selecting pricing objectives, choosing the right pricing models, deciding over price modification strategies, initiating price
changes and responding to price changes by competitors (Kotler, 1983). Most of the variables
are affected by consumer price sensibility, which however, is not a constant factor, but is often affected by situations, which either increase (a variety of product substitutes, noticeable
total expenditure changes on high price levels, easy price comparisons between competing
products) or decrease (real/perceived necessity for the product, presence of complementary
products, perceived product benefits, product differentiation and situational influences) the
sensibility (Ferrell, Hartline, 2011, 242fff). Ability of marketing managers to analyse, react
and also induce beneficial situations can give companies a competitive edge over competition
and help to increase revenue.
2.1.2.3 Place
Place (distribution) related variables include decisions over marketing (distribution) channels,
their design and management choices and decisions over physical distributions, which in turn
9
include decisions over warehousing, transportation and order processing (Kotler, 1983). Good
distribution channels can give companies’ competitive advantages over competitors (e.g.
through speedy production and delivery) and create customer value (Kotler, Armstrong, Harris et al., 2013, 354f). However, in order to achieve these advantages, the company has to
choose the right partners, which can assure a smooth cooperation and operation throughout
the supply chain. Likewise, the companies’ own logistic functions like warehousing, transportation and logistics information management have to be well balanced (Kotler, Armstrong,
Harris et al., 2013, 371) to be able to offer customer-satisfaction on an on-going basis.
2.1.2.4 Promotion
Promotion related variables include decisions around the promotion mix – advertising, public
relations, personal selling and sales promotion. Advertising is used for information announcements and persuasion. Typical advertising campaign starts with setting advertising
objectives, followed by setting budgets, choosing the right messages and media and is rounded up by advertising evaluation (Kotler, Armstrong, Harris et al., 2013, 447). In the long run,
advertising has the ability to build brand preference and decrease price sensitivity of potential
costumers (Mela, Gupta, Lehmann, 1997, 258).
The goal of public relations is to build and sustain good relationships with various stakeholders of the firm – media, consumers and investors. The intention is to build and sustain
positive corporate image and reputation of the company in general and its products in particular (Kotler, Armstrong, Harris et al., 2013, 461).
Personal selling is used for generating sales and building stronger customer relationships
(Kotler, Armstrong, Harris et al., 2013, 475). The advantage of personal selling is the direct
and individual contact to the customer, which makes the consumer-experience more personal.
In comparison to other promotion mix elements, personal selling is more effective on a per
contact basis because while other media make potential customers aware of the product, the
personal sales person has a higher probability to close the deal. On the other hand, it is also
more expensive on a per contact basis, as personal sellers need to be recruited, trained and
then supported on a daily basis. (Cant, van Heerdeen, 2008, 5)
Sales promotion however is used as a short-term incentive to encourage customers to purchase a product or a service (Kotler, Armstrong, Harris et al., 2013, 491). Sales promotion can
use a variety of tools like discounts, free samples, contests, premiums and special packs to
convince the customer in the necessity to buy the product and to do it sooner rather than later
(Kazmi, Batra, 2008, 483). In the long run, sales promotion can make customers more price
10
sensitive and to encourage them to look for price discounts and special offers (Mela, Gupta,
Lehmann, 1997, 257)
Depending on the primary objective of the company, promotion mix elements are used differently by marketers (see Table 1).
Table 1 Overview of promotion mix elements
Advertising
Public relations
Sales promotion
Personal selling
Image/brand
building
Goodwill
Sale
Sale/relationship
Timeframe
Long-term
Long-term
Short-term
Short/long-term
Primary appeal
Emotional
Emotional
Rational
Rational
Contribution to
profit
Moderate
Low
High
High
Primary objective
Source: Leans on Kazmi, Batra, 2008, 484
The number and intensity of used mix elements is affected by the size of the promotional
budget of the company. However, resources spent on promotion activities have proved to
have positive influence on shareholder value (Pride, Ferrell, 2009, 382) and therefore, should
be undertaken by the marketing executives.
2.1.3 The relation between stock price and marketing decision variables
The treated marketing decision variables, along with their various aspects and the stock price
of the respective company affect each other reciprocally. Although, the effect of stock price
on marketing decision variables is a relatively new research area, the impact of marketing on
stock price has gained considerable contributions from the marketing-finance interface research during the last decades (e.g. Srinivasan, Hanssens, 2009; Agrawal, Kamakura, 1995;
Miyazaki, Morgan, 2001; Srivastava, Shervani, Fahey, 1998).
Marketers frequently face the challenge to measure and communicate the effect of marketing
activities on firm value in order to justify marketing budget, the size of the department, and
activities undertaken (Srinivasan, Hanssens, 2009, 293f; Gao, 2010, 25). As it is relatively
difficult to determine the exact monetary gain of marketing activities through, for example,
increased sale numbers on a quarterly basis, marketing managers face the threat of a shorter
term of office than other executive managers (Srinivasan, Hanssens, 2009, 293f; Kumar,
Shah, 2009, 119). However, this kind of recall based on the seemingly bad performance of
marketing managers might not always be justified, as the goal of marketing actions is not only
11
the increase of short-term earnings, but also investing in the companies’ intangible assets like
brand equity, customer loyalty (Srinivasan, Hanssens, 2009, 294), and customer equity (Rust,
Lemon, Zeithaml, 2004, 109f), based upon which the company is able to generate higher revenue streams and contribute to higher future firm value (Kumar, Shah, 2009, 120).
As proof of this, Lev (2004, 109) has found that although it is precisely these intangible assets
that give companies a competitive edge, companies in established sectors who invest intensively in intangible assets are under-priced on the capital market. Lev (2004, 110), similarly
to Jacobson and Mizik (2009, 810), comes to the conclusion that investors are not able to determine the real value of investments in intangibles at once, but need time to see the investments recouped. Meanwhile, however, the stock prices may remain below their real value
and, on one hand, may present arbitrage opportunities for investors, yet on the other hand,
create difficulties for executives, whose goal is to meet the set price targets. If they are reluctant to do so, they may be punished with lower compensation packages or with recall from the
office (Brickley, 2003, 228).
Srinivasan and Hanssens (2009) again look beyond the intangible asset aspect in total stock
return assessment and although admitting that positive changes in brand equity (generated, for
example, through earlier investments in intangible marketing assets) lead to higher firm valuation, they also stress the importance of business results and marketing actions as signals for
(positive) abnormal returns (see also Srinivasan, Pauwels, Silva-Risso, Hanssens, 2009, 26).
Based on an intensive study, Srinivasan and Hanssens propose that the total stock returns of a
company are the sum of expected returns by the investors (and other industry experts) and
abnormal returns, which are dependent on marketing signals and business results (2009, 297)
(see Figure 1).
Their proposed explanatory variables for expected stock returns, gathered in the four-factor
model, are market risk factors, portfolio size risk factors, and value risk factors, (proposed by
Fama-French, 1996) rounded up by momentum factor (proposed by Carhart 1997, who states
that past stock movements indicate future movements in the same direction). These are affected by risk factors, which in turn are dependent on changes in firm results. Firm results are
affected by revenue and earnings surprises, unexpected growth in non-financial metrics like
customer equity and meeting analyst earnings expectations. (Srinivasan and Hanssens 2009)
In contrast to expected returns, abnormal returns may not be influenced so much by firm results, but by the current activities, undertaken by managers and the marketing department.
These include modifications in marketing strategy, unexpected increases in advertising expenditures (Kim, McAlister, 2011, 74), new product introductions, new strategic partnerships,
12
price changes, and positive branding initiatives (Markowitch, Steckel, Yeung, 2005, 1468),
including the use of celebrities in advertisements (Agrawal, Kamakura, 1995, 60), announcement of event sponsorships (Mishra, Bobinski, Bhabra, 1997, 161; Miyazaki, Morgan, 2001,
13) and the change of the company name (Horsky, Swyngedouw, 1987, 330). This approach
suggests that investors react and assess the news about the company, including marketing
activities like price cuts and new product introductions, and reward companies for news perceived as good or punish those perceived as bad. (Srinivasan, Hanssens 2009)
Figure 1 Factors influencing stock returns
Total stock returns
=
Expected returns
Firm results
- Revenue and earnings surprises
- Unforeseen changes in marketing
assets (changes in brand equity, customer equity, customer satisfaction)
- Earnings expectations by analysts/
time-series extrapolations
+
Abnormal returns
Firm Signals/Actions
- Unexpected managerial signals/actions of
the firm
- Switches in marketing strategy and
changes in marketing actions (e.g. product
price increases/decreases, new strategic
partners, product introductions, changes in
executives, advertising campaigns)
Source: Leans roughly on Srinivasan and Hanssens 2009, 297 ff
Whereas firm results and firm signals (and therefore stock prices) are both affected by shortterm marketing decision variables, marketing assets, generally, can only contribute to slow
stock price movements. Marketing initiatives, however, when communicated publicly, are
promptly noticeable by investors and therefore reflected swiftly in stock prices as well. Still,
as initiatives are only action and not outcome variables, it is more difficult to designate their
direct impact on firm value. (Srinivasan and Hanssens 2009, 306)
Furthermore, although positive change in marketing assets generally indicates positive impact
on stock returns (even though in the longer run), this may not be true of all marketing actions.
For example, price promotions may signal weak demand and therefore possible future earnings shortfall (Srinivasan and Hanssens 2009, 307; Srinivasan, Pauwels, Silva-Risso, et al.,
2009, 29). On the other hand, lower prices can, in the short term, rapidly increase sales
(Kopalle, Mela, Marsh, 1999, 30) (in case of price elasticity) and inflate a high amount of
earnings, which is generally rated positively on the stock market. The controversial matter
will be discussed more closely in section 2.2.2.
13
2.2 Framework on the impact of stock price on marketing decision variables
As discussed in the last section, marketing affects the stock price of a company in various
ways, influencing both firm results as well as inducing surprising activities and signals (Srinivasan and Hanssens 2009, 297ff). However, given that the stock price often serves as the ultimate performance measure of a company and might therefore affect managerial decisionmaking, it is fair to assume that the impact is reciprocal.
The following section focuses on the importance of stock price and resulting incentives to
subordinate strategic decisions, including marketing decisions, to its maximization. In this
paper, the impact of stock price on marketing decision variables is understood similarly to
Srinivasan and Hanssens, who argue that stock prices and their movements act as indicators
for the expectations of investors and as signals to managers, and have therefore a significant
impact on marketing decision variables of the respective company (2009, 307f), as well as to
Chakraverty and Grewal, who additionally point out that stock prices, in many ways, also
affect the personal wealth of top executives, and can therefore be a trigger for certain shortsighted marketing actions with the purpose of maximizing short-term earnings to, again, secure a high stock price (2011, 1594ff). The framework of this relationship regarding how the
stock price incentivizes various marketing decisions in the short run as well as in the long run
will be outlined in the following section.
2.2.1 Causes for the impact
As discussed in section 2.1, the goal of top line executives, including the general manager and
marketing manager, should be the maximization of the wealth of the company owners. This is
done by optimal decision-making at various levels in the company. In order to create value for
the shareholders and for that generate profitable revenue streams, the performance of marketing decision variables is relevant (Doyle, 2000, 18), as marketing helps to develop profitable
long-term customer relationships, bring in new customers, sustain customer satisfaction and,
in the process, sell the products and services the company is offering (Kotler, Armstrong,
Harris et al., 2013, 4f).
To achieve that, the focus of management and especially marketing executives, focus should
be long-term oriented (Dekimpe, Hanssens, 1999, 410), as it takes time and effort to build up
customer equity, including its three drivers (Rust, Zeithaml, Lemon, 2000, 53fff). Providing
that the management is indeed committed to the creation and increase of customer equity and,
therefore, to the continuous effort to increase company earnings in time, one could conclude
14
that the company is viable in the long-term. Likewise, the management should be able to
choose the right alternatives to achieve the highest net present value, which is also counted as
one of the characteristics of effective management (Mizik, 2010, 594), as the company can
then contribute to the performance increase of the company.
In order to monitor and measure the performance of the companies (and thus their managers),
stock prices have been used as performance measures by shareholders and other stakeholders
as in an ideal world:
a. They are the best observable compared to all other measures;
b. In case investors on the market are rational, stock prices reflect the long-term consequences of the company’s decisions
c. Investors can trade their stock immediately, which makes stock prices a real and accurate measure of stockholders’ wealth (Damodaran, 2001, 13f).
However, these assumptions, according to many researchers, do not fully correspond to the
reality. Information that the capital market has on the company is often asymmetrical and,
therefore, lacks the ability to assess the performance of the company truthfully and timely
(Nebczuck, 2003, 26). An information shortage does not allow investors to estimate the state
and future development prospects of the company correctly (Mizik, 2007, 362). Particularly
regarding marketing actions, investors acting on the capital market might not be experts in
this field and thus misinterpret the real positive consequences of marketing decision variables.
Additionally, investors might be influenced by the convincing communication of several
stakeholders, like company executives (Srinivasan, Hanssens, 2009, 294), who may have personal interests at stake (Rappaport, 1998, 3), and will therefore manipulate the information in
the desired manner.
In order to align the management’s interest to those of (share)owners and motivate them to
put forth optimal effort for the company’s (stock) performance (Markowitch, Steckel, Yeung,
2005, 14), management’s compensations are often, at least in some proportion, tied to the
objectives of owners. Usually, compensation packages are used in public companies, which
include various types of compensations: a salary, a bonus and incentive compensation (BIC)
programme, stock grants, options, and other compensation instruments (Jarque, Gaines, 2012,
309), like golden parachutes, which function as an insurance package in case the company
suffers a hostile takeover (Dechow, 2006, 196). The use of each instrument varies by company; however, among the S&P 1500 companies1, all of the mentioned instruments (apart from
1
The 1500 largest companies in the US listed on the stock market
15
the golden parachute, as this was not explicitly analysed) were used by more than half of the
companies and with the exception of options, by more than 70% during the period of 2010–
2012 (see Appendix 2). Nevertheless, the proportion of each instrument is dependent on several factors, like the size of the company, e.g. the sales volume, and the industry in which the
firm is operating (Jarque, Gaines, 2012, 321fff).
The stock price, the maximization of which is in the interests of the shareholders, directly
influences several of the instruments (stock grants, options, BIC) included in the
compensation packages (Dechow, 2006, 196). Jarque and Gaines’ (2012) research on the S&P
1500 companies compensation packages during the years 1993–2010 showed, that when
value of compensation = value of salary + value of BIC + value of stock + value of option +
value of other compensation,
(2)
the value of stock, option, and BIC are the biggest contributers to the size of the overall
compensation (see Figure 2) of the top-line managers, constituting, at all times, more than
60% of the total compensation package. Depending on the year, the contribution amounted to
figures even over 80%. Additionally, the downward trend of stock prices is perceived as management’s incompetence or deficiency of management strategy (Srinivasan, Hanssens, 2009,
293), which can lead to the low reputation of managers and cut-offs.
Figure 2 Composition of S&P 1500 CEO compensation packages in 1993-2010
Source: Jarque, Gaines, 2012, 318.
Therefore, under the assumptions that managers are largely motivated by personal gain, executives have clear monetary incentives to persuade the stock market about the company’s good
16
performance, as their own compensation packages are tied to the stock returns (Leone, Wu,
Zimmerman, 2006; Chan, Chan, Jegadeesh et al., 2006, 1041; Mizik, 2010, 594; Athanasakou, Strong, Walker, 2011, 58). Hence, incentives, which are based on short-term stock prices, motivate managers to undertake activities that manipulate stock prices rather than contribute to long-term value maximization (Grant, King, Polak, 1996, 18; Stein, 1989, 659).
Given the dependence of stock price on many factors discussed in 2.1.1 and 2.1.3, managers
have different possibilities to pursue this goal. One of the most probable possibilities, which
has gained much interest from researchers is earnings management to achieve analysts’
benchmarks (Srinivasan, Hanssens, 2009, 293; Degeorge, Patel, Zeckhauser, 1999, 8). Graham, Harvey and Rajgopal come to the same conclusion after investigating CFOs’ positions
regarding key metrics acknowledged by outsiders. 82.2% of CFOs who participate in the
study state that achieving earnings benchmarks is helpful to increase or maintain the stock
price of the company. 86.3% state that it helps to achieve credibility on the capital market.
Quarterly earnings in the previous year and consensus estimates by analysts are named as the
most essential benchmarks. (2005, 5, 25)
Earnings can be influenced and managed in several ways, one of them being accruals management or manipulative earnings reporting (Mizik, 2010, 594; Gunny, 2010, 855), as managers have a certain freedom within accepted accounting principles, to, for example, choose
between different inventory methods or report the sale of products, which have not been sent
out (Degeorge, Patel, Zeckhauser, 1999, 2). However, accruals management does not have a
significant effect on the company’s future market performance, as it causes misinterpretation
of previously achieved results and does not include real activities management with possible
long-term consequences on actual business results (Gunny, 2010, 855f). Also, after regulatory
changes in the US, like the Sarbanes-Oxley Act, the proportion of accruals management is
considered to have lost importance (Singer, You, 2011, 583) in favour of real activities manipulation. Therefore, and since accruals management does not lay in the focus of the current
paper, it will not be discussed more deeply at this point.
The second opportunity, as already implied, is real activities management or, according to
some researchers, myopic management (Mizik, 2010, 594; Roychowdhury, 2009, 338, Stein,
1989, 655f) in the form of earnings management through short-sighted decisions over marketing variables and their budget, with the purpose of generating higher reported earnings to
achieve analysts’ forecasts (Athanasakou, Strong, Walker, 2011, 59). According to this approach, high reported earnings can, in general, be achieved in the course of two reciprocal
ways – either through reducing costs or increasing sales. Reduced costs often come at the ex-
17
pense of constrained budgets for R&D, advertising, and long-term marketing assets (Mizik,
2010, 595f) or reduced production costs through overproduction (Chen, Huang, Fan, 2012,
93; Athanasakou, Strong, Walker, 2011, 64). Sales, however, can be increased in the short
term through better credit terms to buyers (Roychowdhury, 2006, 339; Chen, Huang, Fan,
2012, 93), extended downstream promotions (Chakravarty, Grewal, 2010, 1594), sales promotions (Mizik, Jacobson, 2007, 361), overinvestments to near-term assets and through favouring specific projects (Mizik, 2010, 596). The instruments named will be discussed deeper
in the following chapter.
Achieving results, which are expected by the capital market, is highly important for companies, as the stock market tends to punish those who do not, with falling stock prices (Mizik,
2010, 594). This motivates managers, over their own personal gain, to sustain increased earnings and meet the set earnings targets (Chan, Chan, Jegadeesh et al., 2006, 1041). Pressure to
meet these causes managers to undertake short-sighted actions such as cuts in marketing
budgets (Mizik, 2007, 363). Such cuts might indeed help to enlarge reported earnings and
thus stock prices for a short period, but in the long run might have a negative impact (Mizik,
2010, 594, Stein, 1989, 656f) on sales as well as on brand equity and therefore on long-term
earnings. In addition, Mizik (2010) has found, that due to shortsightedness and maximization
of short-term payoffs, superior opportunities further in the future can be lost. In summary,
excessive concentration on short-term results, investors’ expectations, and stock price can,
according to some researchers, undermine the company’s performance in the future due to
short-sighted marketing activities.
The oppositional body of work (e.g. by Gunny, 2010) has suggested that meeting earnings
benchmarks, although with the help of short-term activities, is important for public companies. The ability to beat benchmarks may signal strength of the company and increases its
reputation among stakeholders, resulting also in better performance in the following periods.
(Gunny, 2010, 857)
In reality, managers have pointed out that it is not as important to achieve high earnings, but
rather to achieve earnings, which are expected by the stock market, as then the high stock
price can be achieved without fostering investors’ expectations excessively positively toward
future earnings and stock prices (Graham, Harvey, Rajgopal, 2005, 43). Chakravarty and
Grewal (2011, 1596f) support this line of research and conclude that stock returns in one period provide a reference point for investors for (short-term) future stock developments. Therefore, good results in one period lead to high expectations in the next one and build up even
greater performance pressure for the management (Mizik, 2007, 362). Along these lines, some
18
companies may also be managing real activities to avoid exceeding earnings targets excessively to prevent too high benchmarks for following periods (Roychowdhury, 2006, 346).
2.2.2 Short-term impact
As argued in the previous sections, the development of a stock price of a company is highly
dependent on the relationship of investors’ earnings expectations and the real reported earnings at the end of the reporting period. For managers, the stock price of the last period also
acts as a reference point, since falling trend of stock prices is seen as a failure of management
strategy. In case it becomes clear, that stock results of the current period might be lower as
expected, managers tend to start managing short-term earnings to improve the stock price.
This can mean prompt effect on marketing decision variables (Mela, Gupta, Lehmann, 1997,
249; Mizik, 2007, 363).
In situations, where managers are under investor pressure to show immediate good financial
results and meet earnings targets, managers feel the necessity to augment earnings either
through increasing revenues or decreasing costs (Degeorge, Patel, Zeckhauser, 1999, 2). In
the first case, most frequent marketing decision variables being used are promotional activities, which have the power to affect consumer decision-making and perception (Chakravarty,
Grewal, 2010, 1598) and therefore, boost short-term sales. Additional advertising is used to
convey consumers of purchasing the brand (Chakravarty, Grewal, 2011, 1598). Often, not
only a one-time purchase is set as the goal, but rather the irrational act of stockpiling (Chapman, Steenburgh, 2011, 72). In retail marketing, this is achieved together with aggressive
price discounts, aisle displays and feature advertisement (Chapman, Steenburgh, 2011, 75),
which manipulate consumers to buy large amounts immediately (Roychowdhury, 2006, 338)
in the fear, that next time, the products might already be more expensive. By using such marketing activities, it may possible for companies to augment its short-term performance
(Chapman, Steenburgh, 2010, 72).
Although beneficial in the current period, this kind of market manipulation can have the consequence of shifting possible future sales to the current period, resulting in earnings shortage
in the next one (Chapman, Steenburg, 2011, 88f). Still, around 40% of the CFOs admit doing
so in case the company is on the verge of not meeting the earnings target (Graham, Harvey,
Rajgopal, 2005, 35) (see Figure 3). Furthermore, feature advertisements and price promotions
at point of sale have either only minor effects on long-term brand benefits (Chapman, Steenburgh, 2010, 72) or affect the brand disadvantageously in the future, as costumers expect further price discounts (Pauwels, Sila-Risso, Srinivasan et al., 2004, 153). In summary, in case
earnings targets have to be met presently and revenues increased quickly, managers favour
19
marketing actions with swift financial results (increased sales) to investments with long-term
pay-offs like customer relationship management (Chakravarty, 2011, 1606).
Figure 3 Answers to the question: Near the end of the quarter, it looks like your company
might come in below the desired earnings target. Within what is permitted by GAAP, which
of the following choices might your company make?
Reduce!discretionary!spending!(e.g.!
Advertising,!R&D,!etc.)!
Delay!starting!with!a!new!project!even!if!this!
means!a!small!sacriOice!in!value!
Book!revenues!now!rather!than!next!quarter!
Incentives!for!consumers!to!buy!more!
products!this!period!
Draw!down!on!reserves!previously!set!aside!
Postpone!taking!an!accounting!charge!
Sell!investments/assets!to!recognize!gains!this!
quarter!
Repurchase!common!shares!
Alter!accounting!assumptions!
0%! 10%!20%!30%!40%!50%!60%!70%!80%!90%!
Source: Leans on Graham et al. 2005, 35
In contrast, the oppositional body of prior research supports the theory of short-term cost reduction to achieve higher earnings. Roychowdhury (2006, 336) and Gunny (2010) find evidence of overproduction to show lover costs of goods sold in the current period. Mizik (2007,
361) suggests, that managers tend to cut spending perceived as discretionary, like advertising
and R&D to give analysts and investors the impression of good short-term results. This view
is shared by Roychowdhury (2006, 340), who argues, that by reducing investments on marketing and R&D simultaneously, it will be perceived as reduction of reported expenses, with
higher earnings as a result. Mizik (2010, 608) goes even further and states, that such simultaneous reductions are beneficial in avoiding earnings shortfalls and thus can have positive abnormal short-term stock prices as a result. Above all, managers believe, that such short-term
actions give a positive appearance of long-term business results and thus have a reassuring
effect on investors (Mizik, Jacobson, 2007, 307).
Graham, Harvey and Rajgopal come to the similar conclusion while interviewing S&P 1500
CFO-s on the question, how the company would react, in case, at the end of the quarter it becomes clear, that continuing as planned, the company would not meet the earnings target. The
20
majority of the respondents (80%) claimed to decrease discretionary spending (see Figure 3).
However, such cost reduction, especially in marketing, to achieve specific stock price level,
can have negative long-term consequences, which will be discussed next.
2.2.3 Medium and long-term impact
The attempt of managers to raise short-term earnings in order to give the impression of better
financial results or rather to achieve better results, does not only impact the immediate revenues and profitability of the company, but also has long-term (lasting over several months and
years) effects on customer perception and thus on future performance of the company (Chapman, Steenburgh, 2011, 90). The matter, if these effects are altogether negative or show positive influences as well, has created controversial standpoints among researchers and is, inter
alia, dependent on the altered marketing decision variable, and the extent of the marketing
action.
In the attempt to show immediate results and short-term payoffs, managers make decisions,
which can be harmful for the company in the long run (Mizik, 2007, 361; Kopelle, Mela,
Marsh, 1999, 330). Using aggressive price discounts to boost sales in one period, can lead
customers to expect such discounts also in the next one (Roychowdhury, 2006, 338). Having
been accustomed to purchase a product at a smaller price, it is difficult to convince customers
to purchase it later at a higher price again. Furthermore, facing price promotions often, consumers may become more price sensitive and start to seek for price discounts in the future
(Mela, Gupta, Lehmann, 1997, 258). Additionally, the high frequency of such practices,
makes customers less receptive to deals and makes it more difficult for the companies to acquire new sales at the expense of competitors (Kopelle, Mela, Marsh, 1999, 330). This, along
with aggressive communication focusing on the price and not on product attributes or brand,
can damage the brand and company’s competitive position on the market (Suri, Manchanda,
Kohli, 2000, 201). As a consequence, in the following periods, managers face the challenge
to, both, improve brand equity and meet new, often higher, earnings targets. In order to do so,
marketing executives have the possibility to either engage in anew myopic management and
lower prices once again, or, they can acknowledge the spiral of negative consequences, invest
in building up marketing assets, and thus suffer lower returns as it takes time to repair the
damage done for the brand.
As underlined in the previous section, the second opportunity to convince the stock market in
the success of the company is to show cost reduction (Mizik, Jacobson, 2007, 362) and thus
enhanced profitability. However, each disruption in marketing expenditures can have a consequence on future marketing assets, competitive position and revenue streams (Mizik, 2010,
21
598). Continuous activities around the marketing mix contribute to the development of marketing assets like customer equity. Due to high marketing assets, companies are able to skim
the market for higher price premiums and profitability (Srivastava, Shervani, Fahey, 1998, 8).
However, in case investments into developing marketing assets are cut abruptly, companies
may lose their competitive advantages in time. This may lead to damaged market position and
lower future revenues. Budget modifications around marketing mix can also damage net present value of the company by reducing long-term stock returns (Chakravarty, 2011, 1595).
In spite of its many threats, some companies, who are in the verge of not meeting earnings
benchmarks, are cutting marketing investments to show increased short-term profitability.
Bearing in mind the importance of stock price for public companies, it is of importance to
understand, whether the stock market recognizes the companies, who are artificially trying to
improve their results. This matter has been addressed by Mizik (2010), who analysed, if stock
market recognizes firms that engage in such budget modifications and reacts to them truthfully, taking into account the possibility of smaller future cash flows due to decreased intangible
assets like brand and customer equity. In this case, companies, who had cut both advertising
as well as the R&D budget simultaneously were analysed. She found, that at the end of the
current period, potentially myopic firms, which have met the earnings benchmarks, have 24%
(BHAR2 results) – 27% (CAR3 results) higher stock returns than firms with negative earnings
surprises (see Appendix 3 for BHAR example) and even 0.7% (BHAR) – 2.3% (CAR) higher
returns than non-myopically behaving companies with positive earnings results. However, the
stock market recognizes the manipulation in the next periods. Consequently, after 4-year period, potentially myopic firms realize 26.7% (CAR) - 33.5% (BHAR) lower returns than firms
with initial positive earnings surprise and 8% (CAR) - 12% (BHAR) lower returns than firms
with negative earnings surprise. (Mizik, 2010)
Mizik (2010) comes to the conclusion that in the long run it is more beneficial to announce
negative earnings surprises than to engage in myopic management through reducing costs on
important marketing assets and R&D. Regardless of efforts to rectify the real performance of
the company, total long term consequences of myopic management will be negative. Mizik
and Jacobson (2007) similarly find evidence on the negative total returns over the course of
four years after engaging in myopic management.
2
BHAR – buy-and-hold abnormal returns. BHAR results measure if the sample of firms earned abnormal returns
during the period in focus (Markovitch, Golder, 2008, 720).
3
CAR – compounded abnormal returns. Biggest difference to BHAR results is, that here risk factor premiums
are stable in time but vary by company (Mizik, 2010, 601).
22
Chapman and Steenburgh come to the similar conclusion, however with an oppositional train
of thought. They present, that companies tend to increase their marketing efforts while in
threat of not being able to meet earnings benchmarks with focus on price promotions and increased use of advertising. However, while analysing the effect of price reductions at the end
of the fiscal year, they find, that companies are able to increase EPS by 5% by the end of the
current period, which is followed by a drop of 7.5% in EPS in the next period. The authors
conclude, that such short-term price reductions amount in total net losses (2011, 91).
Gunny (2010, 857), on the other hand, argues in favour of real activities management (including marketing decision variables) in case it is done to meet earnings benchmarks. She shows,
that real activities management can be necessary to signal positive results to analysts and
achieve more desirable performance in the future. In case earnings benchmarks are not met,
however, the company can send negative signals to the stock market and suffer poor financial
results in following periods. (Gunny 2010)
In addition to the line of impact discussed so far, the stock performance of a company can
impact its marketing decision variables also through the capital structure of the company. The
stock price level can influence the success of the company on the capital market. In case the
success has been poor, company has to manage with smaller budgets and marketing expenses,
including marketing communications, which are often among the first lines to be cut (Graham, Frankenberger, 2011, 5). Due to lowered expenditures, investments into marketing assets may be lowered, but also relevant day-to-day marketing functions like customer relationship management or advertising, may be cut or reduced (Luo, 2008, 150f). Reduced customer
relationship management programs can account to limited customer service support, decreased customer care improvement programs and under investments in complaint handling
(Luo, 2008, 151).
Additionally, negative word of mouth (NWOM) effects can take place due to the impaired
customer service, as people tend to share their negative experiences and affect others by creating prejudice towards the company. In this way, NWOM effects may have severe impact on
companies’ long-term financial results including its cash flows and earnings due to changes in
customers’ satisfaction and customer equity, which, in case the company suffers from resource constraints, cannot be improved through adequate customer relationship management
programs. Resources are more likely to be channelled to marketing activities, which have
more immediate effects on companies’ short-term performance and earnings (Chakravarty,
Grewal, 2011, 1606) to avoid a subsequent misfortune on the stock market. Relevant findings
on this matter will be discussed next.
23
3 Discussion of empirical findings on the impact of stock price on
marketing decision variables
In the course of the last decade, there have been several studies substantiating the impact of
stock price on marketing decision variables empirically. In the last section, the theoretical
framework including causes for the impact of stock price on marketing decision variables
were introduced as well as their short and long-term impacts. In the following section, empirical findings on the impact of stock price on marketing decision variables will be discussed,
focusing on each variable separately. In addition to the researched impact, the research methodology will also be presented more in detail, as this line of research has gathered closer attention only recently and the research methods in use as well as motivations by the researchers differentiate in various aspects. In the second part of this chapter, different company’s
internal and external factors influencing the magnitude of the impact will be introduced and
discussed. Also this area of research has gained the interest of many researchers, as the impact
of stock price on marketing decision variables varies substantially, depending on, for example, the previous success of the company on the stock market, the size of the company and the
sector the company is competing in.
3.1 Short- and long-term effect of stock price on marketing decision variables
The current stock price of a company, its variation in the course of the given period as well as
the development in the last periods, gives managers incentives for real activities to achieve
the stock price (Mizik, 2010, 594), which would satisfy the owners. Managers use a variety of
strategies (Moorman, Wies, Mizik et al, 2012, 934), including real activities manipulation
(Roychodhury, 2006, 337) in response to incentives from the stock market to achieve performance metrics, which would contribute to a raise in the stock price of the company. Real activities manipulation, including manipulation of operational marketing strategies focusing on
the key functions of marketing – the marketing mix, is in past research often suggested to be
effected by the stock price along with managers’ aspirations to achieve a suitable price level
(Chapman, Steenburgh, 2011; Mizik, 2010).
Following Roychwdhury (2006, 337) and Mizik (2010, 595), in this paper real activities manipulation is understood as separation from companies’ usual operational practices with the
purpose of achieving certain financial goals and benchmarks, which would not have been
achieved otherwise. Real activities manipulation is caused by managers’ ambition to misguide
(certain) stakeholders into concluding, that the financial goals were met using traditional prac-
24
tices (and that the company is performing better than it actually is). However, real activities
manipulation does not in general contribute to higher firm value, but merely helps to meet
benchmarks and reporting goals (Roychwdhury, 2006, 337). Nevertheless, some researchers
argue, that companies, which are able to meet (earnings)benchmarks are financially more successful than those, who do not (Gunny, 2010, 857).
Following chapters provide an overview of the empirical researches conducted so far and
their results on the impact of stock price on marketing decision variables. Although the stock
price, through endeavours of managers to meet earnings benchmarks in order to achieve high
stock prices, possibly influences all of the marketing decision variables discussed in section
2.1.2, empirical findings known to the author, can today only substantiate some aspects of the
decision variables. This, however, does not signify the lack of the impact on other decision
variables, but moreover the tightness of research in this field.
The methods and results used in relevant researches, will be discussed deeper at every decision variable separately and a chronological summary of the key findings at each decision
variable level will be provided at the end of the chapter (see Table 2) to present, how the
methods and key areas of research have developed over the last decade.
To identify relevant past empirical studies, a thorough research was conducted by the author
based on different aspects of the research question – how does the stock price impact different
marketing decision variables – in several academic databases (focus mainly on EbscoHost and
Google Scholar). Results of top journals (at first only A+ journals according to VHB
http://vhbonline.org/service/jourqual/vhb-jourqual-21-2011/jq21/ , later also one A journal
was included to expand the research) were selected and processed for relevant empirical results. Thereafter, references that were found from these researches, to other relevant studies
were controlled for, to search for additional empirical studies and their results on this topic.
The majority of the past empirical research focus on the investigation of the companies,
which are performing badly on the stock market or worse than the stakeholders expected.
These companies have greater incentives to improve their stock results. Also, they are more
risk tolerant and are more actively seeking for possibilities to improve their negative position
on the stock market. On the contrary, well-performing companies tend to be more risk averse
and reluctant to change their current strategy, which has found recognition from the stock
market (Markovitch, Steckel, Yeung, 2005, 1470).
3.1.1 Effect on product
In the attempt to meet investor earnings expectations for the current period and to improve the
stock price of the company, several researchers have found empirical evidence of managers
25
undertaking hasty short-term decisions about the key element of the offering – the product.
The direct connection between the stock price and changes in product related decision variables is difficult to estimate, as there are a number of other external factors, which can have an
effect on product related decision variables, for instance customer feedback, trend changes
and competitor actions (Rust, Lemon, Zeithaml, 2004, 110). Nevertheless, connections between stock results and resulting changes in product related variables have been found.
As discussed in section 2.1.2.1, product related variables include both decisions about the
product offering itself (its quality and development), but also about produced quantity, timing
of product launches and the level and quality of customer (after) service (Kotler, 1983). While
it is challenging to change product attributes and quality of the product rapidly in response to
changes in stock prices or shortcomings in expected earnings due to lack of time, changes in
production output and timing of new product innovations can be executed more rapidly. These have also been the main areas of empirical research on the topic of stock price implications
on product related decision variables.
Roychowdhury (2006) in his research finds evidence suggesting, that some public companies
tend to overproduce in order to be able to report lower cost of goods sold (COGS) and in this
way, inflate earnings (for the sake of beating forecasts and thus maintaining or achieving a
favourable stock price). The underlying logic states, that when production of goods increases,
then fixed costs for one unit decrease. As long as increased production does not include an
increase in marginal costs, the total cost for one unit also decreases (Gunny, 2010, 859).
However, with increased number of produced units, inventory costs for storing the products
increase. (Roychowdhury, 2006)
Roychowdhury (2006) suggests, that companies, which have reported small annual profits
during specific years (and have therefore been close to zero-earnings benchmarks in previous
years), have had an incentive, to manage earnings upward through real actions management,
e.g. through overproduction in order to avoid reporting losses. This is in line with Gunny
(2010), who by conducting a similarly structured investigation also finds evidence of firms,
which have just met earnings benchmarks, overproducing in order to report lower COGS
(873).
By comparing descriptive statistics of firm years, at the end of which companies have had
incentives to inflate earnings and have achieved small profits corresponding to 0 ≤
!"#!!"#$%&
!"!#$!!""#$"
< 0.05 with the rest of the sample, Roychowdhury (2006) detects evidence of
overproduction among suspect firm years through significantly lower mean inventory turno-
26
ver (10.75 by suspect firm years vs. 12.80 by full sample). After estimating model parameters
(for a methodological overview, see section 3.1.2) with cross-sectional regression model4,
Roychowdhury (2006) compares suspect firm-years with the rest of the sample and tests the
results with the regression model. He detects higher production costs in suspect firm years
(mean of suspect years is 4.97% higher than the mean for the rest of the sample; production
costs calculated as the sum of COGS and change in inventory), which implies higher inventory growth and lower COGS. This suggests, that companies, which are looking for ways to
meet earnings benchmarks, can result in overproduction with possible consequence of higher
inventory, costs for handling the inventory and difficulties to market the products in case of
seasonal and highly perishable products.
Roychowdhury (2006) conducts a similar research based on an alternative earnings benchmark – an annual consensus analyst forecast. He comes to the similar conclusion that companies likewise engage in overproduction in order to avoid missing consensus analyst forecasts.
In summary, the work of Roychowdhury (2006) demonstrates, that companies are keenly interested to achieve earnings targets and are prepared to undertake short-term activities for
that. As the stock price is highly dependent from meeting earnings targets, one can conclude,
that these activities are ultimately contributing to the current stock price of the company and
therefore, in turn, these short-term activities are initiated by stock price level.
Moorman, Wies, Mizik and Spencer (2012) analyse the impact of stock price from an opposite perspective by investigating a possible ratchet effect5 in stock market. They propose, that
(consumer packaged goods) companies, trying to maximise stock returns, compel themselves
to the stock market by strategically introducing new innovations, e.g. new products, bearing
in mind the necessity of an increasing pattern on innovation introductions towards the end of
the financial year. Thereby, the authors follow the idea of efficient market hypothesis by
Fama, which suggests, that in order to achieve abnormal stock returns, the company has to
offer surprisingly good results, which the market is not expecting (934).
Therefore, instead of introducing new products to the market when they are developed (when
the product is market-ready or at the point when it would maximise revenues due to seasonality (Radas, Shugan, 1998, 301) or secure first-mover advantages), companies established as
strategic innovators, withhold innovations to prevent excessive investor expectations. This is
done to be able to surpass previous expectations by introducing innovations in an accelerating
4
The data is gathered at the end of each year
“Tendency for performance standards to increase after a period of good performance”-Milgrom, Roberts, 1992,
232.
5
27
pace towards the end of the reporting period (Moorman, Wies, Mizik et al., 2012, 935). Following the ratchet strategy, companies are therefore able to surprise the market at the end of
the period. Using the following panel probit model6:
Pr !!" = 1!Ι!!!" , !, !! = Φ !! + !! !!!" + !! !!!" + ⋯ + !!! !!!! + !!" !!"! + ⋯ + !!" !!"! +
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! ,
(3)
Source: Moorman, Wies, Mizik, Spencer, 2012, 941
with yit as binary variable7 of company i (1 in case company engages in ratchet strategy in
year t, 0 otherwise), !!" as an ownership dummy variable (1 in case the company is public in t,
0 otherwise), x2it as total number of innovations in year t, x4i to x23t set of industry and year
dummy variables, Pr denotes the probability, !! public firm status and ! is the cumulative
distribution function of standard normal distribution, the authors first of all substantiate, that
public firms are more likely to use a ratchet strategy (β! =0.497, p<0.05) than private firms.
This shows, that the incentive to use the strategy origins from the stock market. By comparing
innovative introductions of publicly and privately held companies on quarterly basis with exploratory investigation8, the authors find, that private companies are introducing significantly
more innovations in the first quarter, while public companies do this in the fourth quarter (see
Appendix 3).
Thereafter, to analyse if public companies, which are using the ratchet strategy are indeed
being rewarded for that on the stock market, the authors compare abnormal stock returns of
four portfolios consisting of companies, which use different innovation timing strategies. Using calendar-time portfolio approach9 with Fama-French three factor model augmented with
momentum factor:
!!" − !!" = !! + !! !!" − !!" + !! !"#! + ℎ! !"#! + !! !"!! + !!",
(4)
Source: Moorman, Wies, Mizik, Spencer, 2012, 941
with !!" as portfolio return, !!" as return on a 30-day Treasury bill, !!" as a return on a value weighted portfolio of all stocks, !"#! as a large and small capitalization portfolio return
difference, !"#! as a high and low book to market portfolio return difference, !"!! as a
6
Regression, where the dependent variable can only take two values, in this case the company either engages in
ratchet strategy or not
7
Can have only two values, in this case 0 or 1
8
Analyzing the difference of public and private companies’ innovation timing patterns graphically
9
Abnormal returns of the portfolio, which includes all sample firms, are measured over the period (Markovitch,
Golder, 2008, 720). In this case there are four portfolios, which include firms that are ascertained as following
the ratchet, consistent, late all-at-once or early all-at-once strategy.
28
past high and low portfolio return difference, !!" as an error term and regression intercept !p
as the coefficient of interest, the authors find evidence of significant positive abnormal stock
returns of 12.24% over the course of one year for companies, which use innovation ratchet
strategy (Moorman, Wies, Mizik et al., 2012, 947). Results suggest, that by using ratchet
strategy, managers are able to manipulate companies’ stock returns in the wished direction
and that many companies are indeed using this approach to increase their stock returns.
Additionally, Moorman, Wies, Mizik et al. (2012) conduct a survey among 574 marketing
leaders to investigate, which measures are the executives prepared to undergo in order to meet
the earnings target. 27% of the respondents testify to be ready to delay new products or services introduction to the market, which furthermore verifies the results of the conducted research. However, the authors also find evidence of revenue losses, caused by strategic timing
under the strategic innovators in comparison to firms not introducing innovations in stockmarket-strategic manner. This is in line with Graham, Harvey and Rajgopal (2005), who find
by surveying CFO-s of S&P 1500 companies, that 55.3% of the companies are willing to
postpone starting a new project in order to meet earnings targets for the current period, even if
this means a sacrifice in revenues (see Figure 3). Nevertheless, in the case of strategically
delaying the introduction of new products, Moorman, Wies, Mizik et al. (2012) compare the
revenue losses against achieved gains from financial market returns and conclude, that the
losses are significantly lower as the gains. Therefore, such strategic timing choices caused by
stock market incentives may be financially rational.
As seen, empirical evidences from conducted researches imply different impacts of stock
price on product related decision variables (see Table 2). In the first case, the focus of managers’ lies on cost reduction through overproduction, which leaves the company with higher
inventory levels and respective costs for its maintenance. This can result in the necessity of
price reductions in order to dispose excess capacities, which in turn can impact the brand in a
negative way (see 3.1.2). In the second case, managers confess to be willing to postpone relevant projects, like new product introductions, with the risk of losing competitive position and
first-mover advantages but with possible advantages from financial markets.
3.1.2 Effect on price
The price of the product/service is one of the most easily and promptly changeable attributes
of the offering when compared to other marketing decision variables (Kerin, Peterson, 2004,
434). As prices are often decreased only for a short period in order to provide incentives for
customers and increase sales, short-term price decreases are often categorized under promo-
29
tions as price promotions. For the sake of clarity and simplicity, however, all price related
effects in this paper are discussed in the current section.
Price changes result in more immediate effects on the side of demand than changes in, for
example, distribution or product features (Dubois, Jolibert, Mühlbacher, 2007, 389f). In case
the demand is price sensitive, a drop in the price results in a relatively bigger change in increased demand quantity (Ferrell, Hartline, 2010, 242), which altogether can make price decreases economically reasonable in cases where the company is not afraid to enter a price
dumping war with competitors or loose customers due to lost reputation.
Thus, in case the company needs to undertake rapid changes in marketing decision variables
due to (negative) changes in stock movements and needs to accelerate earnings, managers
have the possibility to decrease product prices and expect for sharp earnings upturn. This is
supported by past research, which has presented, that customers, in order to derive advantages
from lower prices, are willing to buy larger quantities of durable goods during decreased prices, or to postpone consumption in the hope to purchase the products with lower prices in the
future (Macé, Neslin, 2004, 340; Chapman and Steenburgh, 2011, 88f).
Strategic price changes by managers, which take advantages of such effects especially in periods preceding the end of the financial year, while the pressure of stock markets to present
high results is at the high points, have been proven empirically. Being motivated to demonstrate, how companies, which performance has suffered in previous periods, use price discounts to accelerate the growth of earnings per share, Chapman and Steenburgh (2011) find
twofold evidence on decreased product prices at the end of fiscal quarters.
For investigating price changes, the authors use the following logistic regressions:
Λ !"#$%&'()%$#
= ! + !! !"#$%&$'()!"# + !! !"#$%&'!"# + !! !"##$%&'"(')*&+!"#
∗ !"#$%&$'()!"# + !! !"##$%&'"()'*+&,!"# ∗ !"#$%&'!"#
!"
+
!! !"#$ℎ!"#$ + !!"# ,
!!!
Λ !"#$%&'()%$# =
! + !! !"#$%&$'()!"# + !! !"#$%&'$!"# + !! !"#$%&'$!"# ∗
!"#$%&$'()!"# + !"
!!! !! !"#$ℎ!"# + !!"# !,
(5)
Source: Chapman and Steenburgh, 2011, 78
with ! !"#$%&'()%$# as a dummy variable in case the sale occurred during a price promotion, QuarterEnd (YearEnd) as a dummy, which amounts 1 in case the sale occurred in the
last month of the fiscal quarter (year) and 0 otherwise; MissedPriorQEPS as a dummy, which
30
amounts 1 in case earnings per share (EPS) in previous quarter were 80%-100% of the EPS
for the respective quarter in previous year and 0 otherwise; JustBeat as a dummy which
amounts 1 in case companies earnings in the beginning of quarter are 0-10% above analysts
forecasts and 0 otherwise.
Results show increased price discount probability at the end of the period (1.8%). Probability
rises to 4.8% in case the company has experienced a decrease in EPS in previous period. In
addition to higher price discount probability, the authors also find evidence on the increased
depth of price discount at the end of fiscal years. By using linear regression for estimating the
size of price discounts, the authors establish a relation between the size of previous year EPS
and depth of price discounts. At the end of the fiscal year, companies, which have experienced a reduction (0-20%) in previous year EPS and are expected of managing earnings upward, are detected to use more severe price reductions than they normally would use. The
magnitude of the price discounts sum up to 33% in comparison to an average year-end discount rate of 15.5% across all products. Similar results on the frequency of price reductions
apply for fiscal quarters. Additionally, Chapman and Steenburgh (2011) investigate, whether
price discounts are supported by increased aisle and display promotions. They find, that regular (planned beforehand) price discounts at the end of the fiscal year are supported by other
marketing actions to increase their effect. However, companies with increased incentives to
manage earnings, experience higher amount of unsupported price discounts in the quarterend. This implies that managers make short-term price reduction decisions, which, due to the
lack of time, are not backed up with supporting marketing actions (aisle and display promotions). (Chapman, Steenburgh, 2011)
The authors also find, that increased sales due to decreased prices come partly (1/3) at the
expense of sales in other periods as customers shift their purchases to the period of decreased
prices. Figure 4 shows how sales volume and revenues decline before the start of price reductions, then they more than double during discounts and fall again abruptly after the discounts,
resulting at the end with a period of lower sales and revenues than normal. (Chapman, Steenburgh, 2011)
Similarly, Graham, Harvey and Rajgopal, during field interviews, detect, that in order to increase earnings and meet earnings benchmarks to satisfy stock markets expectations, companies use measures, which motivate consumers to buy more at the end of the period. To this
end, price increases for the next period are announced to affect customers to stockpile in the
current period. However, reversed strategies are practiced as well, whereby price discounts in
the current period are used for immediate sale enhancement (2005, 40).
31
Weekly revenue/volume standardized to 1 for a regular week
Figure 4 The effect of a 20% price decline on revenues and sales
Source: Leans on Chapman and Steenburgh, 2011, 89
These results are in line with Roychowdhury (2006), who finds evidence of public companies’ sales manipulation activities, such as price discounts (or better credit terms with lower
interests) at the end of the year, to meet earnings targets. Decreasing the price of a product
and therefore being able to increase sales levels (although unsustainably), leads to lower cash
flows from operations (CFO) relative to sales and/or to higher production costs relative to
sales in comparison to the normal sales level in respective year. This occurs, as due to price
decreases, margins of the respective products sold are lower than normally.
In order to confirm the hypothesis, Roychowdhury (2006) compares firm years, during which
!"#!!"#$%&
companies have achieved small annual profits (!"!#$%&!!"#$!!"#$%:!0 ≤ !"!#$!!""#$" < 0,05)
to the sample including all firm years. For model estimation, cross-sectional regressions are
run for different industries for every year. Regression model for normal CFO:
!"#!
!!!!
= !! + !!
!
!!!!
+ !!
!!
!!!!
+ !!
∆!!
!!!!
+ !! ,
(6)
Source: Roychowdhury, 2006, 344
where CFO stands for cash flow from operations, At for total assets at the end of year t , St for
sales during year t and ∆!! for sale increase from previous year to the current one.
Regression model for normal production costs:
!"#$!
!!!!
= !! + !!
!
!!!!
+ !!
!!
!!!!
+ !!
∆!!
!!!!
+ !!
∆!!!!
!!!!
+ !! ,
(7)
Source: Roychowdhury, 2006, 345
where PRODt is the sum of cost of goods sold and inventory growth in year t and the other
variables as explained above.
32
To test, whether the abnormal CFO (and production costs) relative to assets for suspect firm
years are negative (positive) in comparison to firm years with normal values, following regression is estimated:
!! = ! + !! (!"#$)!!! + !! (!"#)!!! + !! (!"#!!"#$%&)! + !! (!"!#$%!!" )! + !! ,
(8)
Source: Roychowdhury, 2006, 349
with Yt as abnormal CFO (or abnormal production costs) in t, SIZE (logarithm of market value
of equity) and MTB (market-to-book ratio) as control variables and SUSPECT_NI as indicator
variable, which amounts to 1 in case firm years = suspect firm years, and 0 otherwise.
Regression model for the comparison of suspect firm years to the rest of the sample shows,
that the CFO is in average 2% lower than in normal firm years. Abnormal production costs as
a percentage of sales are 4.97% higher during suspect years compared to the rest of the sample. Based on these results, Roychowdhury (2006) concludes that public firms use price discounts at the end of the financial year in order to manage earnings and beat analyst forecasts.
This suggests, that instead of undertaking value maximisation activities to increase the longterm value of the company, managers let themselves to be managed by stock market expectations and make short-term decisions to be able to meet those expectations. Decreased prices,
however, do not necessarily lead to higher profits, but can lead to price wars with competitors
and/or to erroneous understanding among customers, that prices are more important than
products or brands itself. Instead of lowering prices, researchers suggest to persuade consumers on the value that the products deliver. (Kotler, Wong, Saunders et al., 2005, 664)
3.1.3 Effect on place
The place, or more specifically distribution strategy of the company, determines the accessibility of the product to the consumers and so the actual revenue stream for the company. In
case purchasing is made easy to the customers (the channel provides both time, location and
possession utility to customers, meaning, that customers can easily purchase products at times
most suitable for them from convenient places with most suitable payment methods), the
channel is perceived as effective (Ferrell, Hartline, 2010, 268). However, in case the company
is experiencing unfavourable stock returns and the distribution network is inefficient due to
high maintenance costs, managers might undertake changes in distribution strategy in the attempt to improve the profitability of the business.
Markovitch, Steckel and Yeung (2005), when analysing the effect of stock price variation on
future marketing activities, find, that pharmaceutical companies which perform badly on the
stock market (annual stock returns of past two years are less than the industry average stock
33
return), make significantly more distribution changes, than well performing companies. The
authors suggest, that firms use capital markets as a source of market intelligence and therefore, when experiencing unfavourable stock movements, act with changes in marketing actions to previous unfavourable returns. This is caused by the attempt to achieve higher returns
in the future through the changed marketing strategy. The endeavour of managers to achieve
high stock prices is explained (as also in chapter 2.2. in the current paper) with the overall
objective of a business enterprise to contribute to high stock results, but also with the dependence of managers’ personal wealth and job security from the stock price of the company.
In order to ascertain badly performing companies (firm’s which stock return is below industry
average), authors divide companies into five groups based on their previous success on the
stock market (top performers in previous year, laggards, consistent top performers during previous two years, consistent laggards, mixed form). Then a negative binomial distribution regression model10 is estimated separately for laggard and top performer subsets to compare the
counts of distributional changes of both subsets. The regression model is estimated as follows:
!!" = exp!(!! +
!!!
!!! !! !"#$!
+
!!!
!! !"#$!
!
∗
∗
∗
+ !! !!"!!
+ !! !!"!!
∗ !!"!!
∗ !! +
!! !"#$%"&'$"()*()$%(+!" + !! !"#$%&!" + !! !"#$%&!"!! + !! ∆!"#ℎ!" + !! ∆!"#ℎ!"!! +
!!" )
(9)
Source: Leans on Markowitch, Steckel, Yeung, 2005, 1474
with !!" as mean of distribution changes of company i at time t, Firmi and Yeart as dummy
variables, Rit-1 as return of company i in previous year, Ii as interaction of the returns of firm i
in previous years (I=1 positive returns in both years, I=0 opposite returns, I=-1 if negative
returns in both years), DistributionControlit as control variable for level of distributional
changes in previous two years, Competit as strategic distributional changes of top competitor
in previous year, Cashit as change in cash flows in year t by firm i. Results indicate, that laggards, on average, make more distributional changes than well-performing companies and
more than all the researched companies on average tend to make. Companies, which have
showed better than average results two year in a row, in contrast tend to make the least changes to their distribution strategies. (Markowitch, Steckel, Yeung, 2005, 1475)
These results illustrate the willingness of badly performing companies to undertake difficultly
reversible high-risk actions (as distributional changes are) as a result of past period lower than
expected stock prices. Alike, they show, that well-performing companies are conservative in
10
Suitable in this case as the data is in the form of counts.
34
making high-risk decisions and rather stand by their proved strategies. Inversely, they tend to
invest into low-risk actions like R&D and detailing. Interestingly, they also invest more in
direct selling as an attempt to gain more value from their current products (Markowitch,
Steckel, Yeung, 2005). Unfortunately, the results do not indicate, which distribution changes
do laggards undertake as response to stock market signals. Likewise, it remains unclear, if the
high-risk actions of laggards pay off in the next periods or result in even worse stock results
due to hasty short-term decisions.
3.1.4 Effect on promotion
As discussed in 2.1.2.4, promotion covers a wide area of marketing, including personal selling, advertising, public relations and sales promotion. While the greater body of research has
focused on investigating advertising and sales promotion (was covered in 3.1.2), fewer researchers have investigated public relations and personal selling. As public relations deal
more with companies long-term goodwill and have relatively low direct impact on profit (see
Table 1), they are usually not so severely affected by companies’ short-term decisions. Additionally, expenditures on public relations activities are difficult to assess and measure by outsiders. Personal selling at the other hand has a strong effect on profit (see Table 1). Nevertheless, Markovitch, Steckel and Yeung (2005) have found evidence of decreased personal selling or detailing efforts (promotion of drugs directly to physicians by sales representatives) by
medical companies as a result of bad stock results. This can be explained by resource constraints due to companies’ bad performance (Markovitch, Steckel, Yeung, 2005, 1477), however as detailing is one of the most important marketing tools by medicine companies (Angell, Relman, 2000, 107), such results show how severely marketing activities can be impacted by the stock performance.
Findings on the impact of stock price on advertising have been controversial until this point.
Chakravarty and Grewal (2011) find evidence of increased advertising expenditures as a result to stock return increases. Due to return increases, investors develop high expectations
towards short-term earnings, which in turn impel managers for short-term actions to guarantee
their expectations’ fulfilment. Using BVARX estimation procedure, they investigate the advertising expenditures (regarded as marketing expenditures by the authors) of 309 hightechnology manufacturing firms, which have a single business unit. Using BVARX model,
the authors are able to capture exogenous variables (control variables like cash flows at t-1,
volatility in cash flows at t-1, size of stock returns in comparison to industry average etc.),
which influence endogenous variables (unanticipated portion of R&D and marketing budget,
stock returns and stock volatility), in the Bayesian modelling. They find, that 43% of the
35
companies increase their advertising budget unexpectedly, whereas 14% decrease it as a result
to last period increase in stock returns. The increase in advertising budget is explained by the
necessity of companies to show even better results in the next period due to increased market
expectations. Further, with the help of content analysis11, Chakravarty and Grewal detect, that
when increasing marketing budgets due to high market expectations, these resources are allocated in directly value-creating activities like promotions and distribution rather than in activities with more distant pay-offs like customer relationship management (2011, 1606).
Similarly, Chapman and Steenburgh (2011) find evidence on increased marketing efforts. The
authors investigate the choice of retail-level marketing actions in regard to their timing and
effect on customers. They suggest, that (marketing) managers of goods, that can easily be
stockpiled (in this case soup), strategically vary the usage of promotional activities over time
and shift the majority of them to the end of the fiscal quarters (similar activities would also
result in wished effects in the middle of the periods, but the authors argue, that until the end of
the period these effects could be reversed). This way, managers can control and affect the
timing of consumer’s purchases and so manage reported earnings (72, 77). To test, whether
companies, which have incentives to manage earnings upward (manufacturers, who have either experienced quarterly earnings decrease in previous quarter, earnings increase in current
quarter or earnings which beat analyst forecasts in the current period), increase the use of
marketing activities, the authors estimate a logistic regression, which was discussed earlier in
section 3.1.2.
The authors find evidence, which report higher probability (1.4%) of using feature promotions
at the end of the reporting period to inflate earnings. The probability is more than two times
higher (3.6%) in case the company experienced a decrease in earnings per share in the previous period. This is explained by the attempt to recoup and beat the targets by the end of the
reporting period. Additionally, in periods, when companies have incentives to manage earnings, the focus of promotional activities shifts from smaller brands to larger and better performing ones within the portfolio (see Figure 5).
To test the hypothesis, that strategic timing of marketing actions is caused by the attempt to
induce consumer stockpiling (and therefore to manage earnings) and not by a seasonality in
campaigns overall, the authors conduct another analysis with goods, that cannot be stockpiled
over a longer period of time (yoghurt). The results show that the intensity of marketing actions for such products does not increase at the end of the fiscal year, thus implying, that in11
Analyzing management discussions in 10-Q reports for frequency of key words like distribution, promotion,
and customer involvement.
36
creased promotions are used to motivate stockpiling and thereby to manage earnings at the
end of the reporting periods.
Figure 5 Use of display promotions among brands with different strength
a. Frequency of display promotion for a typical
year-end (brands within portfolio)
b. Frequency of display promotion following
poor EPS (brands within portfolio)
Source: Leans on Chapman and Steenburgh, 2011, 88.
Mizik and Jacobson (2007), again, by investigating marketing activities during the year of
seasoned equity offering (SEO) of respective companies, find that in attempt to increase the
stock price of the company by inflating earnings, managers tend to decrease marketing expenditures. To determine, whether certain companies are reporting normal size-adjusted earnings and marketing expenditures, the authors use forecasting models to determine values for
both actual values and forecasting values. For this, fixed-effects multivariate time-series models are used. By grouping the firms in four categories, the authors discover, that in the year
when SEO is issued, for an exceptionally large group of companies
!"#!" − !"#!"!!!!! > 0!!and (!"#$!" − !"#$!"!!"!! ) < 0
(10)
applies, whereby ROA is return on assets, Mktg is marketing expenditures, !!"#!and !"#$!
are the forecasted normal values of the previous sizes. Thus, high amount of companies experiences higher return on assets and smaller than expected marketing expenditures, which
shows, that marketing expenditures are often cut in order to be able to report higher earnings.
(Mizik, Jacobson, 2007, 369).
Similarly, Graham, Harvey and Rajgopal (2005), in the course of field interviews and surveys, reveal the willingness of executives to decrease discretionary spending including advertising costs in order to beat earnings targets. 80% of the respondents admit the possibility of
doing so, making it the most common strategy to achieve the desired target. However, as discretionary spending consists besides advertising also of R&D and maintenance costs, clear
conclusions cannot be made regarding reduced advertising costs. It is also possible, that costs
are reduced at the expense of R&D (e.g. Mizik, 2010) and advertising costs are kept constant.
37
Table 2 Summary of key findings on the impact of stock price on different marketing decision variables
Author
(Journal,
Year)
Motivation
Source and type of
data
Method of
analysis
Dependent variable
Independent variable
Central findings
Companies postpone new
projects for the sake of
higher earnings. CFOs hold
earnings as the most important benchmark
Companies tend to overproduce to lower COGS, and
inflate earnings to avoid
reporting losses and not
meeting annual consensus
analyst forecasts
Impact on product related decision variables
Graham,
Harvey,
Rajgopal
(JoAE,
2005)
Roychowdhury (JoAE, 2006)
Gunny
(CAR, 2012)
Moorman,
Wies, Mizik
and Spencer
(MS, 2012)
To investigate the
importance of earnings
benchmarks,
real activities manipulation
To reveal the existence of real operational activities to
manage
earnings:
development of empirical methods to
detect real activities
manipulation
To reveal how real
activities
management is used to meet
benchmarks and how
these activities affect
subsequent
firm
performance
Survey
answers
from 312 executives,
40-90 min interviews with 20 senior
executives
Annual firm data:
COMPUSTAT,
4252 firms, 21758
firm-years
over
1987-2000, regulated industries, banks,
financial institutions
excluded
COMPUSTAT:
annual data for years
1988-2002, 39432
observations, 5452
firms, excluded are
companies in financial and utility industry
Survey, field
interview
-
-
Crosssectional regression, regression model
Inventory growth;
normal production
costs;
abnormal
production costs
Crosssectional regression, regression model
Normal production
costs;
abnormal
production costs;
industry adjusted
CFO
To reveal the impact
of stock price on
strategic timing of
innovation introductions by public companies
Secondary sources:
Datamonitor’s Product Launch Analytics (product introductions in FMCG:
food, drug and mass
Panel probit
model, calendar time portfolio approach
(Fama-French
model
aug-
Likelihood
of
adopting the ratchet strategy; abnormal returns
Total assets at the end of
the period, sales during
the period; COGS, inventory growth; indicator variable for suspect
firm years, control variables (size, MTB, net
income)
Total assets, market
value, Tobins’s Q, sales;
indicator variable for
suspect firm years, control variables (size of
total
assets,
MTB,
ROA); abnormal returns,
financial health, indicator variables for beating
forecasts, using RM
Dummy variables: ownership status, industry,
year, number of introduced innovations; return diff. btw. big and
small cap. stock portfo-
Companies use real activities like overproduction,
decreased R&D and SG&A
expenditures to be able to
meet earnings benchmarks
and maintain favourable
stock prices. Such activities
have pos. effects on subsequent firm performance in
case the targets are met
Public companies tend to
strategically time their innovations/new product introductions to achieve a
higher stock price. For this,
an increasing pace of inno-
38
retailers),
Compustat, CRSP etc. in
years
1995-2007,
30223 observations
mented with
momentum
factor), survey
lio, high and low book- vations towards he end of
to-market stock portfo- fiscal year is necessary
lio, high and low past
stock returns portfolio
Impact on price related decision variables
Graham,
Harvey and
Rajgopal
(JoAE,
2005)
Roychowdhury (JoAE, 2006)
Investigate the importance of earnings
benchmarks,
willingness for real activities manipulation
To investigate if
managers are undertaking real activities
(price reduction) to
manage
earnings
upward
Chapman
and Steenburgh (MS,
2011)
Investigation
of
earnings
management through marketing actions to
meet benchmarks
Survey
answers
from 312 executives,
40-90 min interviews with 20 senior
executives
Annual firm data
from COMPUSTAT
21758 firm-years in
1987-2001, excluded
are regulated industries, banks, financial institutions
ERIM:
purchase
patterns of 2500
households in 19851988; 114870 observations;
financial
data:
Compustat,
Thompson
Financial, One Source:
soup and yoghurt
manufacturers
Survey, field
interviews
-
-
Companies are reporting
higher prices for the next
period to increase sales in
the current period, price
discounts to boost sales
Total assets at the end of Companies use price disthe period, sales during counts and offer better credthe period; indicator it terms to rise sales and
variable for suspect firm meet earnings targets
years, control variables
(size, MTP, net income)
Crosssectional regressions
mode, regression model
Cash flow from
operations as a
percentage of assets;
abnormal
CFO
Logistic
gressions
re-
Occurrence
of
special price; %
change in mean
price
between
months
Dummy variables for the
case the purchase occurred at the end of the
fiscal quarter/ fiscal year
and for the case the
company missed last
year’s EPS benchmark
in the previous quarter
Companies offer price discounts at the end of fiscal
years to meet earnings targets, price discounts are
deeper than normally at the
end of the fiscal year
Negative binominal distribution regression
Number of changes in distribution
strategy
Firm’s annual stock
returns,
distributional
changes of relevant
competitors, changes in
firms cash flows, firm
Companies, which underperform the industry on the
stock market, make more
changes to their distribution
in contrast to industry outperforming com-
Impact on place related decision variables
Markovitch,
Steckel,
Yeung (MS,
2005)
To investigate the
impact of stock price
on marketing decisions. Types of decisions undertaken in
Lexis-Nexis, DowJones
Interactive,
ABI/Inform,
SDC
Platinum, company
annual reports;
39
response to stock Pharmaceutical inprice changes
dustry: 1980-2000.
value, dummy variables panies, which make fewer
for year and firm
changes to their distribution
networks.
Impact on promotion related decision variables
Markovitch,
Steckel,
Yeung (MS,
2005)
To investigate types
of activities undertaken in response to
stock price changes
Mizik,
Jacobson (MS,
2007)
Investigation of possible myopic marketing management of
firms at time of SEO
Chakravarty
and Grewal
(MS, 2011)
To investigate the
willingness to decrease
marketing
spending in order to
avoid earnings shortfalls and thus falling
stock prices.
Chapman
and Steenburgh (MS,
2011)
To investigate shifts
in retail-level marketing actions in
order to time consumer purchases and
manage earnings
Source: Composed by the author
Lexis-Nexis, DowJones
Interactive,
ABI/Inform,
SDC
Platinum, company
annual
reports:
1980-2000
Thomson Financial
Securities database,
COMPUSTAT,
CRSP, firms issuing
SEO
1970-2001,
2238 observations
COMPUSTAT,
Center for Research
and Security Prices:
309 single business
unit firms from four
technology
manufacturing industries,
8915 observations in
1995-2009
Supermarket scanner
data (purchase patterns of 2500 households) and firm-level
financial data, 19851988; 114870 obs.
OLS
sion
regres-
Detailing effort
Fixed-effects
multivariate
time-series
panel
data
model
Change in marketing intensity
BVARX estimation procedure, content
analysis
Change in marketing budget, change
in R&D budget
Logistic
gression
Occurrence
of
feature and display
advertising
re-
Firm’s annual stock
returns,
competitors
actions, changes in cash
flows, firm value, dummy variables for year
and firm
Change in ROA
Companies, which underperform the industry, lay
less effort on detailing (personal selling) due to resource constraints
Past abnormal stock
returns, past stock volatility, control variables:
cash flows, volatility in
cash flows, dummy variables: firm’s stock price
in relation to industry’s
average, industry ownership, leverage
Dummy variables: purchase time (end of fiscal
quarter/year), company
missed EPS benchmark
in the last quarter
Majority of companies increases marketing budget as
a result of increased stock
returns. Resources are allocated in directly valuecreating activities like promotions and distribution
Firms lower their marketing
expenditures during the
year of SEO to inflate earnings
Majority of promotional
activities of FMCG that can
be stockpiled, are shifted to
the end of reporting periods
to be able to manage earnings
40
3.2 Factors influencing the impact of the stock price
Among possible impacts, what the stock prices can have on different marketing decision variables, prior research has identified the existence of specific factors, which shape the magnitude and nature of the impact. While some companies, or more specifically, the actions of
their managers are more dependent on the stock price of the company and its movements,
others can act more freely and independently, bearing more in mind the long-term success of
the company than short-term stock price control. Generally, the factors influencing the magnitude of the impact of the stock price on marketing decision variables are somewhat similar to
the factors influencing managerial decision making in general and can be divided into environmental, organizational and decision-specific factors (Rajagopalan, Rasheed, Datta, 1993,
352). In this paper, the focus lies on organizational and environmental factors, whereby organizational factors find a greater importance as they have a greater generalization power and
a more wide-ranging and stronger effect on the magnitude of the impact (see Table 3).
3.2.1 Organizational factors
Organizational factors like past strategies, past performance, organizational structure, the size
of the company, organizational slack, power distribution and the characteristics of the management team impact the process and outcomes of managerial decision-making (Rajagopalan,
Rasheed, Datta, 1993, 352). Depending on the importance and extensiveness of decisions, all
of the above can have an impact on the decision procedure. Additionally, personal characteristics (Hitt, Tyler, 1991, 339) and possible personal gain for the decision makers will be determinative of the outcomes as well. When it comes to important decisions, which have effects
on current and future success of the company, on its competitive advantages and brand value,
the upper management is the most effected. However, decision over marketing decision variables and more specifically over concrete marketing activities, can be made both on the upper
management level, but also by different brand managers depending on the scope of the decisions (Chapman, Steenburgh, 2011, 84).
As the stock price of the company is one of the key performance metrics of the success of the
company, decisions around factors influencing the stock price are highly important and
should be treated with discretion, bearing in mind possible concurrent effects. The same
should apply for the reversed phenomenon – stock price movements of the respective company should, and often are, regarded as signals for the management on how the performance of
the company is seen and valuated by shareholders and analysts. Based on the price movements and trend of the stock price, management can undertake decisions about future market-
41
ing activities to improve the performance of the company with the help of increased sales
numbers, decreased costs or magnified marketing activities.
As stated earlier in this work and verified by empirical research, the impact of the stock price
on companies marketing decision variables is the strongest, in case the company is under performance pressure and likely to not meet earnings targets set by analysts (Mizik, 2010, 595;
Graham, Harvey, Rajgopal, 2005, 5; Markovitch, Steckel, Yeung, 2005, 1469f; Roychowdhury, 2006, 365). The impact is the stronger, the greater is stock market scrutiny - the
amount of consideration the company receives from the stock market, which is in turn dependent on the amount of analysts who are on average following the company’s performance
(Moorman, Wies, Mizik, Spencer, 2012, 938, 944).
These companies are willing to undertake more aggressive changes to their marketing actions
(like distribution and product portfolio) than companies, who are performing well on the stock
market (Markovitch, Steckel, Yeung 2005, 1478). The willingness to make more extreme
steps proceeds from the necessity to change the negative status quo and abruptly improve the
reputation of the company. Top-performing companies, however, take the subtle information
embedded in the stock price as a confirmation of their right marketing management strategy
and mostly continue with proven strategies, undertaking only minor changes with lower risks,
like increasing their marketing activities, in their marketing strategies. (Markovitch, Steckel,
Yeung 2005, 1478f)
Empirical evidence has substantiated, that the effort of companies to achieve high earnings
and therefore affect the stock price is not constant in time, but rather achieves its highpoints at
the end of the fiscal calendar. This is explained by the relative small pressure to show high
numbers at the beginning of the year, which, however, drastically increases towards the end
of the fiscal year. Also, some results of the marketing activities are believed to only have
short-term effects on earnings and would therefore loose its effects until the end of the fiscal
year if initiated too early. (Chapman, Steenburgh, 2011)
The effort of managers to achieve and maintain higher stock prices is driven by a number of
motivations – to maximise the wealth of the owners as the most important goal of a business
enterprise, to signal strong management ability to maintain high management positions and to
keep the cost of capital under control (due to low stock volatility) (Graham, Harvey,
Rajgopal, 2005, 67), but also, to maximise personal wealth, which is often bound to the stock
price (Jarque, Gaines, 2012, 318). The greater the relationship between stock price and manager’s personal compensation package and the greater the opportunity, that the manager is
planning to leave the company in the current period, the greater is his commitment to achieve
42
higher short-term stock prices via undertaking short-term marketing actions (Mizik, 2010,
594ff).
Likewise, specific events, during which the current stock price is particularly important, can
affect the impact of stock price on marketing decision variables. For example during the day
of a leveraged buyout or during seasoned equity offering, the company is particularly interested in achieving a favourable stock price as the stock price influences the amount of resources,
the company can acquire from the capital market (Mizik, Jacobson, 2007, 363).
The size of the firm is an additional factor, which impacts the necessity and capability of the
company to respond to changes on the stock market. Chakravarty and Grewal (2011, 1598)
argue, that bigger companies hold both larger slack resources and bigger cash reserves, which
make them more independent from the external capital, its short-term degression. Also, due to
organizational slack, companies face lower risk arising from possible unexpected events
(Nooraie, 20112, 412) and managers of companies with bigger slack resources have found to
make more rational strategic decisions (Nooraie, 2007, 114).
Additionally, if necessary, companies with big slack resources are able to repurchase shares
from shareholders (Handa, Radhakrishnan, 1991) in order to decrease reliance on equity capital (Stein, 1989, 661). Therefore, managers of bigger companies can be less troubled by investor discontent and short-term earnings shortfalls and invest more in long-term assets
(Chakravarty and Grewal, 2011, 1599). The latter is in line with, Harvey and Rajgopal (2005,
27), who find that smaller and younger companies are more interested in stakeholders’, including shareholders’, motivation and thus meet earnings benchmarks whenever possible.
Researchers have also proposed additional factors influencing the magnitude of the impact,
which however until this point have not found empirical generalization. Markovitch (1480),
for example has suggested to investigate the relationship between the ownership structure or
board composition and the willingness to make short-term decisions to improve the stock
price. Gunny (877), on the other hand, using the maturity hypotheses12, offers to investigate
the age of the company and its effect on the investment opportunity of the company, which in
turn affects the ability of the company to undertake bigger changes in marketing strategy.
Brickley (2003, 232) and Hitt an Tyler (1991, 332f), however, advise to bear in mind personal
and demographic traits of executives (such as the age), suggesting, that for example managers
with higher age may be more careful in undertaking risky decisions, which sacrifice long-term
12
Mature companies have less investment opportunities, which is shown in their declined rate of reinvestments,
declined ROI and increased excess cash (Grullon, Michaely, Swaminathan, 2002, 389f)
43
value for short-term results. This in turn means smaller impact of short-term stock price on
marketing decision variables in case the executive is older and higher otherwise.
3.2.2 Environmental factors
In addition to firm specific factors, a body of research has found evidence of environmental
factors, which can affect the magnitude of the impact the stock price has on marketing decision variables. First and foremost, the industry and its concentration have gained interest of
prior research. Graham, Harvey and Rajgopal (2005, 27) have found, that especially activities
of companies in technology industry are impacted by the short-term stock price. Chakravarty
and Grewal (2011, 1598) on the other hand substantiate, that companies in industries, where
the concentration is higher, are less sensitive to stock price implications, because the higher
the concentration, the bigger the companies acting in this industry and therefore the bigger
their slack resources and independence from external equity.
The latter is in line with Moorman, Wies, Mizik and Spencer (2012, 945), who however provide an alternative explanation to the relationship between higher industry concentration and
lower likelihood of stock price impact on marketing actions, in this case more specifically
strategic timing of innovative product launches. Firstly, they argue, that companies with
greater market power and market share are stronger in the race for profit as they are only divided under a certain amount of companies and delaying the introduction of new products
would mean losing market share. Secondly, in case of very big FMCG companies, stock markets do not value introduction of new products as greatly as the linkage between new product
introduction and rise in performance is not very likely.
In summary, companies and therefore their marketing activities are differently impacted by
the influence of the stock price. While some companies, due to their organizational and environmental factors, can allow themselves, bigger independence of signals and expectations
coming from the stock market, others, who are more affected by the success on the stock
market, must consider them more.
4 Evaluation and implications
Evidences on different impacts on marketing decision variables have been quite controversial
until this point. Following, an evaluation on the results is provided, focusing on the main
trends and generalizations, which can be drawn from the joint results. Thereafter, possible
implications for management and other stakeholders are suggested.
44
Table 3 Factors influencing the magnitude of the impact
Factors
Illustrative Metrics
Data Source
Illustrative Papers
Central Findings
Performance of the company, likelihood of meeting earnings targets
Size of current and past
earnings, EPS
Financial
statements
If company is likely not meeting earnings targets,
likelihood of changing marketing decision variables
is higher
Firm stock market scrutiny
Number of analysts in average following the firm
I/B/E/S database
Mizik, 2010; Graham
et al., 2005; Markovitch et al., 2005;
Roychowdhury, 2006.
Moorman et al., 2012
Time, e.g. position in
fiscal calendar
Quarters, months
Financial
statements
Chapman, Steenburgh, 2011
Dependence of top managers compensation from
the stock price
Occurrence of specific
events like LBO, SEO
Percentage of the compensation tied to the stock
price
Occurrence of the event
Employment
contract
Mizik, 2010
Press-releases,
newspapers
Mizik, Jacobson, 2007
Size of the company
Size of cash reserves and
slack resources
Financial
statement
Chakravarty and
Grewal, 2011
Amount of companies in
the industry, relative market shares
Market research
Chakravarty, Grewal,
2011; Moorman et al.,
2012
Organizational factors
Companies under greater stock market scrutiny are
more likely to me managed by stock market incentives and use a ratchet strategy
Companies are more likely to change their marketing decision variables during the last quarter, at the
end of the fiscal year
The personal motivation of the manager to concentrate on short-term stock results affects the willingness to prioritize short-term results
During LBO and SEO, the company is especially
interested in high stock prices, whereby marketing
decision variables are subordinated to this goal
If the company holds high cash reserves and its
slack resources are relatively big as well, the company has a greater independence from equity capital
and investors content.
Environmental factors
Industry concentration
Source: Composed by the author
The higher is the industry concentration, the greater
the independence from equity capital and investors
content; the lower is the motivation to ratchet
45
4.1 Evaluation
Previous empirical results, identified between 2005 and the present on the impact of stock
price on marketing decision variables are quite different in nature, varying by the aspect of
decision variable in focus, units of analyses and motivation of authors. The congruent finding
across all the research, however, is that the stock price indeed impacts marketing decision
variables. On a large scale, the reasoning can be divided into three:
1. Companies are incentivized by the stock market to manage earnings in order to satisfy
analysts’ and investors’ expectations and maintain/achieve favorable stock prices. For
this, real activities manipulation in the field of marketing is undergone either to:
a. increase sales; or
b. reduce costs.
2. Strategic activities are undergone, which have proven to be favorable for increasing
stock prices due to analysts’ exceeded expectations or increase in investor’s sentiment
and attitude towards the company.
3. Due to misfortune on the stock market and therefore later on the capital market, companies are sometimes fiscally restricted in their marketing activities and are forced to
reduce costs. The effect of this is similar to 1.b.
In some cases also the parallel use of both 1a. and 1b. is in use to accelerate the pace in which
necessary results can be presented.
Stock market impacts on all of the marketing mix elements discussed in 2.1.2 have been documented by past empirical research. Results on the product-related decision variables show a
variety of strategies as to how companies can react to incentives from the stock market. Evidence of overproduction at the end of the fiscal year in the ambition to lower COGS is presented (Roychowdhury 2006), which can, however, lead to difficulties in disposing of overproduced items in the next period. From a controversial point of view, delaying of new product introductions is verified (Moorman, Wies, Mizik, Spencer, 2012) in order to strategically
influence stock market expectations or to postpone possible costs to the next period (Graham,
Harvey, Rajgopal, 2005). This has been an interesting finding. Prior research has verified the
positive effect of new product launches on stock prices (Srinivasan, Pauwels, Silva-Risso,
Hanssens, 2009, 41); however, the attention has been rather on satisfying product market
needs and accumulating new sales (Pauwels, Sila-Risso, Srinivasan et al., 2004, 147) than on
stock market manipulation through strategic timing of innovation launches. This shows that a
46
portion of companies is becoming more and more aware of stock market expectations and
using this information to regularly exceed the expectations regularly.
Findings on price-related decision variables are the most congruent over different studies.
Price reductions at the end of the fiscal period are often used to increase sales (Chapman and
Steenburgh, 2011; Roychowdhury, 2006). However, despite their free use in practice, price
reductions may place the future success of the company into jeopardy by weakening the firm
value in the long-run and educating customers to prefer discounted products (Pauwels, SilaRisso, Srinivasan et al., 2004, 153). Additionally, as many companies use price promotions
regularly, it becomes more and more difficult to win customers over from competitors only by
relying on price promotions (Kopalle, Mela, Marsh, 1999, 326). Better credit terms, however,
or even a subtle announcement of price increases in the future may provide the same results
by avoiding the negative consequences accompanied by price reductions.
The impact of stock price on distribution-related decision variables has gained the least attention by research so far. This can be explained by the large timeframe and scope of activities
needed to make changes in distribution strategies, which in turn makes it difficult to designate
the roots of such activities to one concrete cause. However, it has been established that companies with good results on the stock market result in making less distributional changes than
those who underperform the market (Markovitch, Steckel, Yeung, 2005). The latter is comprehensible since the willingness of badly performing companies is greater to make rapid
changes in their strategy with the hope of improving financial results.
Results on promotion-related decision variables are the most controversial when compared to
others. While one body of research focuses on the substantiation that companies tend to decrease promotional activities as a result of stock market incentives to inflate earnings (Mizik,
Jacobson, 2007; Markovitch, Steckel, Yeung, 2005), the oppositional body of research has
come to the exact opposite result (Chakravarty, Grewal, 2011; Chapman, Steenburgh 2011),
demonstrating that in the ambition to increase sales, companies tend to focus especially on
increased advertising efforts. Controversy in results may be caused by a difference in the unit
of analysis and in the suitableness of data. Usually, companies do not reveal their marketing
expenditures; however, information on advertising expenditures is sometimes public (Kim,
McAllister, 2011, 68). Therefore, while some researchers have been able to analyze advertising expenditures, others have analyzed either the state of discretionary expenses, which additionally to advertising expenses comprises expenses for R&D and maintenance or the whole
budget directed for marketing activities in general and presumed, that the greatest proportion
is directed to advertising. Additionally, prior research differs in their units of analysis – while
47
some concentrate only on one specific field (e.g. medicine), others have chosen a wider perspective, covering, for example, all retail goods companies.
4.2 Implications for the management and other stakeholders
The thesis summarizes and discusses interesting insights, which should be useful for managers but also for other stakeholders including investors and analysts of the company. The thesis
has substantiated that stock price often has an important role in managerial decision making,
especially in the field of marketing. There are different possibilities as to how managers can
impact the course of the stock price, using marketing decision variables to achieve or surpass
stock market expectations. One of the easiest opportunities with the quickest effects, which is
used often in practice, are price discounts, which are timed to have their effects on earnings
directly prior to quarterly earnings announcements. However, price discounts are believed to
lose their effect more and more in the future, due to their large usage in practice. Additionally,
price discounts may indeed increase sales for a certain period, but these sales do not come
only at the expense of competitors’ sales, but in case the goods can be stockpiled over a longer time period, they may influence companies’ own sales in the next period negatively. Executives should be aware of this effect and cautiously analyze possible consequences for the
following periods. Analysts, on the other hand, should be able to recognize the real reasons
and possible consequences for rapid earnings increases towards the end of the reporting periods and make corresponding conclusions regarding the real strength of the company.
Other promotional methods, like increased use of advertising prior to the year-end to contribute to higher sales are also captured by empirical findings. Compared to price reductions, advertisements have the advantage of contributing to longer-lasting effects of brand preference
on the side of the product market and signal superior financial wealth to investors (Kim,
McAllister, 2011), which makes advertising a beneficial investment even if the company is
actively seeking possibilities to increase short-term stock price.
In addition to the information, which managers can acquire from the stock market on the expectations toward their own company, information and signals sent toward competitors can be
of importance as well. Under the assumptions that a large proportion of companies is taking
stock market signals seriously and adapting real marketing activities accordingly, it might in
some degree be possible to predict competitors’ future marketing strategies around the marketing mix.
For investors and analysts it is important to note that firms that are by a particularly short
head beating earnings benchmarks are more likely to have managed real marketing activities.
48
For such companies, there may be a threat, that they have invested more in achieving shortterm results than building up long-term marketing assets. On the other hand, by beating the
forecasts, they substantiate their ability to satisfy market expectations and compete in the
changing market environment. Analysts and investors should also be aware that certain companies, such as those with small slack resources and relatively small market shares whose
managers’ compensation packages are strongly tied to companies’ stock returns, are more
likely to be managing short-term marketing activities than others.
5 Conclusion
The aim of this work has been to verify if and why the stock price of the company affects its
marketing decision variables, how the relation comes to life, and, most importantly, to provide a systemized overview of previous empirical results on the impact of stock price on marketing decision variables.
The impact of the stock price on companies’ marketing decision variables has been verified in
this thesis through a theoretical framework on the different relationships between companies
and their management’s goals, as well as an overview of former empirical evidences on the
impact of stock price on marketing activities. Executives are generally motivated to maintain
a high stock price because the goal of a business enterprise is firstly to increase its owners’
wealth, which is, among other factors, dependent on the stock price of the company. Secondly, the personal wealth of executives is tied diversely to the company’s performance on the
stock market. By maximizing the stock price of the company, executives are able to maximize
their own bonuses and monetary gains, which are reliant on the company’s stock prices. Additionally, the performance of their management strategy is evaluated through the course of the
stock price, which makes their job tenure and later success on the job market likewise dependent on the stock price.
At the same time, a lower than expected stock price can trigger a chain of reactions, as a result
of which the company may have smaller success on the capital market and therefore less resources, which can be invested into marketing activities and marketing assets. This can result
in lower future sales, decreased customer satisfaction, and negatively affected reputation,
which, in turn, affects the stock price of the company in a negative manner.
In order to satisfy the stock market and analysts’ expectations, management boards tend to be
aware of the signals originating from the stock market and take them into account while making strategic decisions. Publicly traded companies have, for example, recognized that certain
49
marketing activities have the ability to signal superior performance, the capability to generate
increasing cash flows, and act competitively in a changing market environment. News in particular on new product and advertising innovations are, for example, positively welcomed by
the stock market. Unfortunately, the empirical significance on the usage of such activities has
not yet gained sufficient academic notice. It would be interesting for future research to further
examine the use of such signaling activities by companies and their immediate as well as
long-term impact on the financial performance of the company.
Another important indicator for the successful management of the company and for maintaining the positive sentiment of the stock market toward the company is the achievement of
benchmarks. As underlined by many studies used in this work, executives consider the
achievement of earnings benchmarks the most important of those. A majority of companies
are very interested in meeting earnings benchmarks and are prepared to undertake short-term
marketing actions, which grant higher earnings to the company, even if the company may
suffer a slight decrease in long-term market performance as a result.
The empirical research conducted during the last decade has revealed a variety of marketing
activities within the four marketing decision variables examined in this thesis, which are used
by companies in the attempt to please the stock market and achieve a higher stock price in the
process. Most agreement among academic researchers is achieved over the price strategies of
public companies. In order to boost sales and increase earnings to achieve benchmarks, companies offer price discounts, whose impact is often only short-term but still immediate and
strong. However, due to the high usage of price discounts, their effect may be decreasing in
time. Increased advertising is also documented by prior research; however, as its effect on
sales is thought to be more long-term oriented, its usage is somewhat controversial. Under
product-related variables, different measures are discovered as to how companies, after considering stock market signals, alter their activities. The strategic timing of product innovations
is one of the most notable results discovered.
The oppositional body of research has discovered that some companies tend to reduce their
marketing budget altogether in order to show high earnings through decreased costs. Yet, this
kind of myopic marketing management has received a great amount of negative feedback, as
it may damage companies’ intangible assets, such as customer equity, and may therefore
jeopardize the long-term performance of the company. However, in this matter the sentiments
of researchers also tend to go in opposite directions – while some find such activities irresponsible and subversive, others see them as necessary in signaling the company’s financial
capability.
50
In either way, less successful companies on the stock market in particular (who have barely
achieved earnings benchmarks or performed poorly in previous periods) are revealed to undertake radical short-term activities and manipulate the company’s financial results in order
maintain a favorable stock price. In addition, some other organizational and environmental
factors, like the company’s stock market scrutiny and availability of slack resources, have
been documented by the research, which influence the impact of the stock price on companies’ managerial decisions. Ultimately, however, decisions to undertake rapid short-term activities originate from the people who are managing the company, so it is fair to assume that
the personal traits of the executives have an important role in this function as well.
One of the limitations of this work has been its great attention towards earnings benchmarks
and companies’ efforts to meet them. It is possible that there are also other financial and nonfinancial metrics and benchmarks, which are in the scope of managers’ interests. Investigation
of these along with their impact on marketing decision variables could be interesting for future research.
Also, the prior research lacks an integrated empirical research, where the impact of stock
price on all the marketing mix elements would be studied simultaneously. So far, research has
only focused on certain aspects of marketing activities at once, which is understandable, as
information on companies’ marketing activities and budgets is often not publically available.
An integrated approach, however, which would in the first phase ascertain companies’ success on the stock market and in the second phase focus on investigating companies’ marketing
strategies through the eyes of executives could reveal new and valuable insights to the topic.
Understanding marketing managers’ priorities and their willingness to act according to stock
market indications brought into accordance with a company’s actual success on the stock
market, could bring a more thorough understanding of the impact stock price actually has on
marketing decision variables and how it varies with the level of the company’s success.
51
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American
Marketing
Association
https://www.ama.org/resources/Pages/Dictionary.aspx?dLetter=D
(2014):
(abgerufen
am
15.09.2014)
German
Academic
Association
for
Business
http://vhbonline.org/service/jourqual/vhb-jourqual-21-2011/jq21/
20.11.2014)
Research
(abgerufen
(2014):
am
58
Appendix
Appendix 1. Formation of Analysts’ Earnings Forecast
Source: Leans on Athanasakou, Strong, Walker, 2011, 62
EPS (-1)
announced
EPS0
announced
Analysts forecast EPS0
(AF0beg) and EPS1
(AF1beg)
Analysts forecast EPS0
(AF0pre)
EPS1
announced
Analysts forecast
EPS1 (AF1post)
Analysts forecast
EPS0 (AF0YE)
Year-end(-1)
Year-end (0)
t
AF0pre EPS0
AF0beg
AF0beg
REV
REVYE
AF0YE
SURP
AF0pre
REVPE
Year-end (1)
59
Appendix 2. Proportion of S&P 1500 companies after the use of compensation instrument
Source: Jarque, Gaines, 2012, 324.
Appendix 3. BHAR results for abnormal returns of portfolio of differently acting companies
Source: Mizik, 2010, 607.
60
Appendix 4. Innovation Timing Patterns Across Private and Public Firms
% of innovations introduced
Source: Moorman, Wies, Mizik, Spencer, 2012, 943
Private
Public
Differences between private and public companies are significant in the first (p<0.05), third
(p<0.1) and fourth quarter (p<0.01). No significant differences between the sets in the second
quarter.
61
Eidesstattliche Versicherung
Hiermit versichere ich an Eides Statt, dass ich die vorliegende Arbeit selbstständig und ohne
die Benutzung anderer als der angegebenen Hilfsmittel angefertigt habe. Alle Stellen, die
wörtlich oder sinngemäß aus veröffentlichten und nicht veröffentlichten Schriften entnommen
wurden, sind als solche kenntlich gemacht. Die Arbeit ist in gleicher oder ähnlicher Form
oder auszugsweise im Rahmen einer anderen Prüfung noch nicht vorgelegt worden.
_________________________
_____________________________
Location, Date
Signature
62
Curriculum Vitae
General information
Name:
Date of birth:
Nationality:
Address:
Greta Kingola
01.12.1989
Estonia
Tööstuse 47a-4,
10416 Tallinn
Telephone:
Email:
00372 56467570
[email protected]
Education
Since 10. 2012
2009 – 2012
18.10.2010 – 30.08. 2011
01.09.1998 – 19.06.2009
University of Cologne, Major Marketing
Rochus and Beatrice Mummert-Foundation scholarship
holder
Tallinn University of Technology, Bachelor in Business Administration, Major Marketing
Ludwig-Maximilians-University Munich, Major Marketing
Tallinn German Gymnasium, Graduation with Deutsches Abitur
and Estonian State exams. Gold medal for excellent results.
Employment history/Internships
Since 03.2014
01.2014 – 03.2014
09.2012/03.2013/09.2013
09.2011 – 09.2012
09.2011-09.2012
08.03.-30.08.2011
Since 10.01.2010
07.2008
09.2007-06.2008
Consultant at Communication agency In Nomine OÜ in Tallinn
Management Trainee at ERGO Insurance Baltic Strategy division
Internship at In Nomine OÜ in Tallinn
Board Member at the NGO SENT (Starting Entrepreneurs
Network for Tomorrow)
Group-leader of innovation camps at Estonian Disaincentre
Marketing internship at Sun International GmbH in Munich
Member of the Student Council at Tallinn University of Technology
Internship at Stiftung Leuchtfeuer in Cologne
CEO of the Student Company Information & Memories 3.
Place at the competition “Best Student Company n Estonia
2008”
63
Additional Qualifications
10.2013
08. 2012
2010-2011
05.2010
11. 2008
10. 2008
Group-leader and organizer of a business-camp by Junior
Achievement Estonia in Republic of Moldova
Conference „On the Edge of Success“ in Porto, Portugal
Project „Europa macht Schule“ in German schools
“European Innovation and Creativity Camp” 2010 in Brussels,
Belgium
Conference „Crossing Borders in Thinking and
Acting“ in Copenhagen, Denmark
Course „Money, banks and financial markets“ at Estonian Business School
Languages
Estonian
German
English
Finnish
Russian
Mother language
Very good
Very good
Weak
Weak
Additional information
Driver’s licence
Interests
Class B
Tennis, Skiing, Travelling, Reading