Early Corporate Ad Strategy Impacts Future Stock Prices, Brand Impact

  • by , Staff Writer @lauriesullivan, January 13, 2016, 1:20 PM

    The ability for paid advertising to impact stock price depends on the strategy created by the company’s founders at founding, and rarely changes as it matures, according to research released Wednesday.


    The research, from professors at the Kelley School of Business at Indiana University, the McCombs School of Business at the University of Texas and the W. P. Carey School of Business at Arizona State University, analyzed how paid advertising both offline and online influences the uptick in stock price.


    Niket Jindal, assistant professor of marketing at the Kelley School of Business, and a team of researchers found that a startup’s early corporate strategy goes on to impact nearly everything the governing board does such as determining priorities, the type of employees hired, and items they invest in.


    Strategies are innate within the company based on the founders. Each company will typically follow either a differentiation or cost leadership strategy. The latter tends to invest in advertising to build short-term awareness. While this increases immediate sales, it doesn’t translate into brand equity that builds future sales.


    Very rarely does this change, unless the company has a major strategic shift such as a merger or acquisition, or spins off from a parent company and gets a restart, Jindal says.


    More often than not, companies that have a differentiation strategy tend to push up stock prices through advertising, creating brand equity.


    “Investors believe in the future,” Jindal says, pointing to Mercedes and Tiffany as positive examples of companies that can raise the stock price with advertising. “It must translate into expected future cash flow.”


    A company’s innovative technology or an analyst firm like Credit Suisse raising Alphabet’s stock price to $900 from $850 — which made the stock rise 1% — can impact the value of the company, so researchers accounted for profit, debt, macroeconomic factors, among other things.


    “The reason a stock price rises is because investors see it’s investing in brand equity,” Jindal says.


    The amount spent to create “share of voice” can improve a stock price, but it is considered in aggregate across the company’s specific market. For example, with automotive or electronics manufacturers, it’s the dollar amount spend relative to the market segment’s competitors.


    In some cases, advertising can hurt the stock price, Jindal found. He pointed to a Pet Smart Super Bowl TV spot, where investors penalized the company for spending too much.


    While the initial research analyzes paid advertising, researchers plan to analyze the differences between paid vs. organic advertising, such as word of mouth or search query rankings in Google, Bing and Yahoo, and whether one media has more influence over another. 


     


    MediaPost.com: Search Marketing Daily

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