The Impact of Brand Quality on Shareholder Wealth

This study examines the impact of brand quality on three components of shareholder wealth: stock returns, systematic risk, and idiosyncratic risk. The study finds that brand quality enhances shareholder wealth insofar as unanticipated changes in brand quality are positively associated with stock returns and negatively related to changes in idiosyncratic risk. However, unanticipated changes in brand quality can also erode shareholder wealth because they have a positive association with changes in systematic risk. The study introduces a contingency theory view to the marketing-finance interface by analyzing the moderating role of two factors that are widely followed by investors. The results show an unanticipated increase (decrease) in current-period earnings enhances (depletes) the positive impact of unanticipated changes in brand quality on stock returns and mitigates (enhances) their deleterious effects on changes in systematic risk. Similarly, brand quality is more valuable for firms facing increasing competition (i.e., unanticipated decreases in industry concentration). The results are robust to endogeneity concerns and across alternative models. The authors conclude by discussing the nuanced implications of their findings for shareholder wealth, reporting brand quality to investors, and its use in employee evaluation

Assessing the Financial Impact of Brand Equity with Short Time-Series Data

In this chapter, we describe an approach to estimating the total long-term impactof brand perceptions on financial performance. The approach relies on modelingthe stock market reactions to changes in brand perceptions and allows estimatingtheir total impact even with limited time-series data. We present an application ofthe method to the Y&R Brand Asset Valuator (BAV) data. The analyses showthat, on average, the bulk of brand impact on financial performance is realized inthe future and the contemporaneous effects reflect only a small portion of the totalimpact. The analyses, however, also show considerable heterogeneity acrossindustries: while in some industries the whole impact of brand asset occurs incurrent period only (restaurants), in other industries it occurs in future periodsonly (high-tech). Further, some components of consumer perceptions have differentialeffects in different industries. Returns to brand building, and to marketingefforts in general, should not be evaluated based on contemporaneousoutcomes, but should rather be evaluated over a long-time horizon

The Financial Markets and Customer Satisfaction: Reexamining Possible Financial Market Mispricing of Customer Satisfaction

We investigate the association between information contained in the American Customer Satisfaction Index (ACSI) metric and future stock market performance. Some past research has provided results suggesting that the financial markets misprice customer satisfaction; i.e., firms advantaged in customer satisfaction are posited to earn positive future-period abnormal stock returns. We reexamine this relationship and find that statistically significant evidence of financial market mispricing of customer satisfaction is limited to firms in the computer and Internet sector. The results suggest that the mispricing anomaly reported in past research appears not to stem from a systemic failure of the financial markets to impound the financial implications of customer satisfaction into current stock price, but rather from abnormal returns achieved by a small group of satisfaction leaders in the computer and Internet sector over the period of study. Analyses based on unconditional risk covariates and analyses using conditional risk covariates estimated from short-window, high-frequency data support this finding.marketing metrics, valuation, mispricing, customer satisfaction, financial performance, efficient markets

Myopic Marketing Management: Evidence of the Phenomenon and Its Long-Term Performance Consequences in the SEO Context

Managers often have incentives to artificially inflate current-term earnings by cutting marketing expenditures, even if it comes at the expense of long-term profits. Because investors rely on current-term accounting measures to form expectations of future-term profits, inflating current-term results can lead to enhanced current-term stock price. We present evidence that some firms engage in this type of “myopic marketing management” at the time of a seasoned equity offering (SEO). In particular, a greater proportion of firms than is typical report earnings higher than normal and marketing expenditures lower than normal at the time of their SEO. Although they realize that firms might be undertaking strategies to artificially inflate current-term earnings, the financial markets are not adequately identifying and properly valuing the firms doing so. Our results indicate that myopic firms are able to temporarily inflate their stock market valuation, but in the long run, as the consequences of cutting marketing spending become manifest, they have inferior stock market performance. We propose some actions that might reduce the incentives for myopic behavior.myopic marketing management, marketing strategy, marketing resource allocation, signal jamming, long-term financial performance, abnormal stock returns

—Customer Satisfaction-Based Mispricing: Issues and Misconceptions

We appreciate the opportunity to respond to the commentaries and additional analyses by Fornell et al. [Fornell, C., S. Mithas, F. V. Morgeson III. 2009a. The economic and statistical significance of stock returns on customer satisfaction. . (5) 820–825] and Ittner et al. [Ittner, C., D. Larcker, D. Taylor. 2009. The stock market's pricing of customer satisfaction. (5) 826–835]. Both studies have multiple theoretical and econometric limitations that challenge the validity of their arguments and findings (e.g., neither study allows for time-varying risk factor loadings in their assessments of mispricing although the composition of firms in their analyzed portfolios changes over time, Fornell et al. mischaracterize the efficient markets hypothesis, and Ittner et al. do not use standard panel data econometric methods and models). Generalizations about customer satisfaction, like any other construct, should be assessed by appropriate econometric methods and should withstand rigorous scrutiny. We believe an open, frank dialogue can help clear up misconceptions, air central issues, and advance better understanding of methods and analyses for assessing the financial market implications of marketing metrics such as customer satisfaction.customer satisfaction, mispricing, value relevance