The Interpretation of Marketing Actions and Communications by the Financial Markets

Previous studies have shown that managers are overwhelmingly likely to sacrifice long-term firm value for immediate earnings and satisfaction from the financial markets (Graham, Harvey, and Rajgopal, 2005). Research in marketing has empirically confirmed this myopia at both aggregate (Mizik and Jacobson, 2007; Mizik, 2010) and individual firm levels (Chapman, 2011). That is, marketing managers consider not only actions that impact real earnings, but also how their firm is immediately perceived by the financial markets. Although plenty of research exists detailing how managers care about the financial markets, how the financial markets react to marketing actions has received less attention. That is, how do board members and the general financial markets interpret marketing spending and actions? This dissertation investigates how firms walk the walk and talk the talk regarding marketing spending and communication of strategy. Specifically, I address the following questions: (1) How do financial markets interpret real investments in marketing? and (2) How are these investments and strategic directions communicated to the financial markets? First, I find that markets only appreciate changes in marketing investments when those changes directly result in earnings, not when the investments are made. Second, I created a novel dataset of communications between firms and markets that investigates how marketing constructs are transmitted to the investment community. To address these questions, I use a mixture of event and drift studies. This first essay (a) highlights the importance of long-term stock market reactions and event studies and (b) provides evidence managers can give investors on how firm spending should be interpreted. This evidence is consistent with the market initially under-appreciating marketing efforts. Specifically, I find differences in the immediate market response to earnings announcements for firms expanding versus reducing their marketing and R&D effort. The findings suggest that the stock market takes time to fully incorporate implications of strategic marketing decisions and tends to update firm valuation when the outcomes of marketing strategies are realized in future financial performance and new performance signals are sent to the market. The second essay is distinctive in that although a large amount of research has addressed marketing information released by firms, mine is the first to look at marketing information that is released on a periodic basis along with annual announcements. The essay also examines the stock market's reaction to such information. I studied non-financial disclosures from 1,745 earnings statements for the existence and valence of classical marketing constructs, including the 4Ps, 3Cs, consideration of external factors, and the amount of space given to management, operations, accounting, and financial measures. First, using this unique dataset, I determine which metrics executives are likely to be discuss taking into account a firm's financial situation. Second, using event study methodology, I estimate which constructs have a higher ability to move the market and increase firm value. Third, by creating long-term portfolios, I determine which statements truthfully create long-term value for the firm and which are merely cheap talk meant to moderate market response.