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Working Paper

Product Innovations, Advertising Spending, and Stock Returns

Shuba Srinivasan, Koen Pauwels, Jorge Silva-Risso, and Dominique M. Hanssens, 2006 [06-110]

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Marketing managers are under continuing pressure to measure and communicate the contribution to firm value of their actions. How do their investments in customer value creation and customer value communication affect stock returns?

Srinivasan, Pauwels, Silva-Risso, and Hanssens address that question with a large-scale econometric analysis of product innovation and associated marketing mix in the automobile industry. They examine how customer value creation (i.e., new product introductions) and customer value communication (i.e., advertising spending) lift stock returns by improving future cash flows. Specifically, they calculate the stock-return impact of:

• introducing a new product,
• introducing a pioneering innovation,
• increasing advertising support for a new product introduction by $1 million, and
• increasing promotional incentives for a new product introduction by $1000.

Findings

First, while a new product introduction generates modest valuation gains of up to .11%, a pioneering new product generates much higher gains of 2.75%. In other words, while investors typically view product innovations favorably, what really differentiates firms is the extent to which they are pioneering, i.e., new to the market. In addition, the firm-value impact of new product introductions is higher in larger, high-growth categories.

Second, an incremental outlay of $1 million in advertising support of an innovation generates up to .10% in valuation gains, but up to .44% gains for a pioneering innovation. Thus, the firm value impact of new product introductions is higher when they are backed by substantial advertising investments. Communicating the differentiated added-value to consumers yields higher firm-value effects of innovations, especially for pioneering innovations.

In contrast, promotional incentives do not increase firm-value effects of new product introductions, as they may signal an anticipated weakness in demand for the new product.

Included in the following collections:
MSI Reports 2006

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