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 greta.kingola@gmail.com 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, in-

cluding their revenues and costs. By varying marketing decision variables, such as pricing

strategies, executives can impact short-term sales quantities and the resulting revenues. Sec-

ondly, 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 deci-

sion 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 mar-

ket 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 re-

cent decade, also marketing – are the areas, to which reference is made the most.

2

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 lit-

erature 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 sig-

nals 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 con-

nected 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 al-

ready 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 incen-

tives.

Therefore, alongside the practical importance of the topic, this thesis is also theoretically rele-

vant 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

3

the first attempt to provide such an overview of specific impacts on marketing actions, sys-

temized by different marketing decision variables.

To reach these goals, this thesis is divided into five parts. After introduction, the work pro-

ceeds 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 over-

view 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 deci-

sion 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 stra-

tegic marketing decisions. At the end of the chapter, a differentiation is made between short-

term 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 im-

pact 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 man-

agement more than others.

The thesis continues in the fourth chapter with an evaluation and systematization of the em-

pirical 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 market-

ing decision variables. Starting with a review of the company and its management’s motiva-

tion 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 ac-

cordance with prior research, due to the impact of stock price. Thereupon, possible conse-

quences of such decision are presented and discussed. The chapter, and thereby the thesis,

closes with suggestions for future research.

4

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 re-

mainder of the section deals with the relationship of stock price and marketing decision varia-

bles 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 stake-

holders 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 cus-

tomer 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 confi-

dence 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 suc-

cessfully 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, trans-

actions 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 im-

portance of earnings and corresponding metrics (e.g. EPS, E/P) are emphasized both by prac-

titioners 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).

6

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 ef-

fect on the stock price. One of these categories that influences fundamental factors like earn-

ings 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 reve-

nue 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 promis-

es (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 manage-

ment process (Kotler, Armstrong, Harris et al., 2013, 5).

The optimal choice of different marketing decision variables also creates and shapes market-

ing 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 com-

pany 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 satisfac-

tion and retention, which in turn is a result of, for example, right price-quality ratio, commu-

nication strategy (Vogel, Evanschitzky, Ramaseshan, 2008, 100, 104), pricing decisions of the

7

product portfolio, service quality and convenience (Rust, Lemon, Zeithaml, 2004, 113, 118).

In summary, choosing and undertaking optimal marketing activities around all of the market-

ing 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 (distribu-

tion)” (https://www.ama.org/resources/Pages/Dictionary.aspx?dLetter=D, 15.09.14). Follow-

ing, 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 im-

portant is the timing of the launch of the new product, which can ensure competitive ad-

vantages (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 ques-

tions when and to whom should the company sell the products, the quantity plays an im-

portant 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 seri-

ously 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 at-

tributes. 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 adjust-

ment 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 (Lamb-

in, 2008, 139).

Among final price setting, price related variables include selecting pricing objectives, choos-

ing 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 of-

ten 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, Har-

ris 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, transpor-

tation 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 an-

nouncements and persuasion. Typical advertising campaign starts with setting advertising

objectives, followed by setting budgets, choosing the right messages and media and is round-

ed 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 stake-

holders 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 particu-

lar (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 pur-

chase 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 differ-

ently by marketers (see Table 1).

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 re-

search 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

Table 1 Overview of promotion mix elements

Advertising Public relations Sales promotion Personal selling

Primary objective 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

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 rev-

enue 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 inten-

sively 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 de-

termine the real value of investments in intangibles at once, but need time to see the invest-

ments 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 reluc-

tant 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 val-

uation, 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 affect-

ed 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 re-

sults, but by the current activities, undertaken by managers and the marketing department.

These include modifications in marketing strategy, unexpected increases in advertising ex-

penditures (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), announce-

ment 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 per-

ceived as good or punish those perceived as bad. (Srinivasan, Hanssens 2009)

= +

Source: Leans roughly on Srinivasan and Hanssens 2009, 297 ff

Whereas firm results and firm signals (and therefore stock prices) are both affected by short-

term 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 earn-

ings 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.

Total stock returns Expected returns

Abnormal returns

Firm results - Revenue and earnings surprises - Unforeseen changes in marketing assets (changes in brand equity, cus-tomer equity, customer satisfaction) - Earnings expectations by analysts/ time-series extrapolations

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)

Figure 1 Factors influencing stock returns

13

2.2 Framework on the impact of stock price on marketing decision varia-

bles

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 (Srini-

vasan and Hanssens 2009, 297ff). However, given that the stock price often serves as the ul-

timate performance measure of a company and might therefore affect managerial decision-

making, 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 short-

sighted marketing actions with the purpose of maximizing short-term earnings to, again, se-

cure 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 market-

ing 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 conse-

quences of the company’s decisions

c. Investors can trade their stock immediately, which makes stock prices a real and accu-

rate 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 per-

sonal 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 compa-

ny; 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 sev-

eral 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 man-

agement’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, exec-

utives 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; Athanasa-

kou, Strong, Walker, 2011, 58). Hence, incentives, which are based on short-term stock pric-

es, motivate managers to undertake activities that manipulate stock prices rather than contrib-

ute 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). Gra-

ham, 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 man-

agement or manipulative earnings reporting (Mizik, 2010, 594; Gunny, 2010, 855), as manag-

ers 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 ma-

nipulation. 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 market-

ing variables and their budget, with the purpose of generating higher reported earnings to

achieve analysts’ forecasts (Athanasakou, Strong, Walker, 2011, 59). According to this ap-

proach, 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 pro-

motions (Mizik, Jacobson, 2007, 361), overinvestments to near-term assets and through fa-

vouring 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 compa-

nies, 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 earn-

ings 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 compa-

nies. 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 peri-

od provide a reference point for investors for (short-term) future stock developments. There-

fore, 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 exces-

sively 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 earn-

ings 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 activi-

ties, 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 (Chap-

man, 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 mar-

keting 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 con-

sequence 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, Steen-

burgh, 2010, 72) or affect the brand disadvantageously in the future, as costumers expect fur-

ther 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?

Source: Leans on Graham et al. 2005, 35

In contrast, the oppositional body of prior research supports the theory of short-term cost re-

duction to achieve higher earnings. Roychowdhury (2006, 336) and Gunny (2010) find evi-

dence 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 mar-

keting 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 simulta-

neous reductions are beneficial in avoiding earnings shortfalls and thus can have positive ab-

normal 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 be-

comes clear, that continuing as planned, the company would not meet the earnings target. The

0%! 10%!20%!30%!40%!50%!60%!70%!80%!90%!

Alter!accounting!assumptions!

Repurchase!common!shares!

Sell!investments/assets!to!recognize!gains!this!quarter!

Postpone!taking!an!accounting!charge!

Draw!down!on!reserves!previously!set!aside!

Incentives!for!consumers!to!buy!more!products!this!period!

Book!revenues!now!rather!than!next!quarter!

Delay!starting!with!a!new!project!even!if!this!means!a!small!sacriOice!in!value!

Reduce!discretionary!spending!(e.g.!Advertising,!R&D,!etc.)!

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 reve-

nues 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 (Chap-

man, Steenburgh, 2011, 90). The matter, if these effects are altogether negative or show posi-

tive 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, con-

sumers 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 ac-

quire 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 con-

sequence on future marketing assets, competitive position and revenue streams (Mizik, 2010,

21

598). Continuous activities around the marketing mix contribute to the development of mar-

keting 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 pre-

sent 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 truthful-

ly, 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 peri-

od, 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 in-

creased 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 (includ-

ing 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 (Gra-

ham, Frankenberger, 2011, 5). Due to lowered expenditures, investments into marketing as-

sets may be lowered, but also relevant day-to-day marketing functions like customer relation-

ship management or advertising, may be cut or reduced (Luo, 2008, 150f). Reduced customer

relationship management programs can account to limited customer service support, de-

creased 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 creat-

ing 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 re-

source 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, empiri-

cal 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 meth-

odology will also be presented more in detail, as this line of research has gathered closer at-

tention only recently and the research methods in use as well as motivations by the research-

ers 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 exam-

ple, 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 varia-

bles

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 perfor-

mance metrics, which would contribute to a raise in the stock price of the company. Real ac-

tivities 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 ma-

nipulation 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 suc-

cessful 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 deci-

sion 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 re-

sults. 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 varia-

bles 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 be-

tween 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. The-

se 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 invento-

ry 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 bench-

mark – an annual consensus analyst forecast. He comes to the similar conclusion that compa-

nies likewise engage in overproduction in order to avoid missing consensus analyst forecasts.

In summary, the work of Roychowdhury (2006) demonstrates, that companies are keenly in-

terested 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 oppo-

site 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 seasonali-

ty (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 5 “Tendency for performance standards to increase after a period of good performance”-Milgrom, Roberts, 1992, 232.

27

pace towards the end of the reporting period (Moorman, Wies, Mizik et al., 2012, 935). Fol-

lowing 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 ex-

ploratory 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. Us-

ing 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 val-

ue 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 ser-

vices introduction to the market, which furthermore verifies the results of the conducted re-

search. 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 stock-

market-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 manag-

ers’ 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 rele-

vant 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 in-

creased demand quantity (Ferrell, Hartline, 2010, 242), which altogether can make price de-

creases 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 pric-

es, 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 pe-

riods 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 demon-

strate, how companies, which performance has suffered in previous periods, use price dis-

counts 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 promo-

tion, 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 experi-

enced a reduction (0-20%) in previous year EPS and are expected of managing earnings up-

ward, 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 dis-

count 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 regu-

lar (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 quarter-

end. 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 promo-

tions). (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 reduc-

tions, 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, Steen-

burgh, 2011)

Similarly, Graham, Harvey and Rajgopal, during field interviews, detect, that in order to in-

crease earnings and meet earnings benchmarks to satisfy stock markets expectations, compa-

nies 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

Source: Leans on Chapman and Steenburgh, 2011, 89

These results are in line with Roychowdhury (2006), who finds evidence of public compa-

nies’ 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.

Wee

kly

reve

nue/

volu

me

stan

d-ar

dize

d to

1 fo

r a re

gula

r wee

k

Figure 4 The effect of a 20% price decline on revenues and sales

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 re-

gression 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 sam-

ple. Based on these results, Roychowdhury (2006) concludes that public firms use price dis-

counts 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 long-

term value of the company, managers let themselves to be managed by stock market expecta-

tions 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 consum-

ers 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 accessi-

bility 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 at-

tempt 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 there-

fore, when experiencing unfavourable stock movements, act with changes in marketing ac-

tions 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 depend-

ence 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 pre-

vious two years, consistent laggards, mixed form). Then a negative binomial distribution re-

gression 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 lag-

gards, 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 chang-

es 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 sell-

ing, 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 re-

searchers 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. Addi-

tionally, expenditures on public relations activities are difficult to assess and measure by out-

siders. Personal selling at the other hand has a strong effect on profit (see Table 1). Neverthe-

less, Markovitch, Steckel and Yeung (2005) have found evidence of decreased personal sell-

ing 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 con-

straints due to companies’ bad performance (Markovitch, Steckel, Yeung, 2005, 1477), how-

ever as detailing is one of the most important marketing tools by medicine companies (An-

gell, Relman, 2000, 107), such results show how severely marketing activities can be impact-

ed 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 re-

sult 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 ad-

vertising expenditures (regarded as marketing expenditures by the authors) of 309 high-

technology 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 allo-

cated in directly value-creating activities like promotions and distribution rather than in activi-

ties 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 ei-

ther 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 previ-

ous 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 earn-

ings, the focus of promotional activities shifts from smaller brands to larger and better per-

forming 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 ac-

tions for such products does not increase at the end of the fiscal year, thus implying, that in- 11 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.

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 ex-

penditures. To determine, whether certain companies are reporting normal size-adjusted earn-

ings 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 mod-

els 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 expe-

riences 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 sur-

veys, reveal the willingness of executives to decrease discretionary spending including adver-

tising 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 dis-

cretionary 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.

a. Frequency of display promotion for a typical year-end (brands within portfolio)

b. Frequency of display promotion following poor EPS (brands within portfolio)

Figure 5 Use of display promotions among brands with different strength

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 varia-ble

Independent variable Central findings

Impact on product related decision variables Graham, Harvey, Rajgopal (JoAE, 2005)

To investigate the importance of earn-ings benchmarks, real activities ma-nipulation

Survey answers from 312 executives, 40-90 min inter-views with 20 senior executives

Survey, field interview

- - Companies postpone new projects for the sake of higher earnings. CFOs hold earnings as the most im-portant benchmark

Roychow-dhury (Jo-AE, 2006)

To reveal the exist-ence of real opera-tional activities to manage earnings: development of em-pirical methods to detect real activities manipulation

Annual firm data: COMPUSTAT, 4252 firms, 21758 firm-years over 1987-2000, regulat-ed industries, banks, financial institutions excluded

Cross-sectional re-gression, re-gression mod-el

Inventory growth; normal production costs; abnormal production costs

Total assets at the end of the period, sales during the period; COGS, in-ventory growth; indica-tor variable for suspect firm years, control vari-ables (size, MTB, net income)

Companies tend to overpro-duce to lower COGS, and inflate earnings to avoid reporting losses and not meeting annual consensus analyst forecasts

Gunny (CAR, 2012)

To reveal how real activities manage-ment is used to meet benchmarks and how these activities affect subsequent firm performance

COMPUSTAT: annual data for years 1988-2002, 39432 observations, 5452 firms, excluded are companies in finan-cial and utility in-dustry

Cross-sectional re-gression, re-gression mod-el

Normal production costs; abnormal production costs; industry adjusted CFO

Total assets, market value, Tobins’s Q, sales; indicator variable for suspect firm years, con-trol variables (size of total assets, MTB, ROA); abnormal returns, financial health, indica-tor variables for beating forecasts, using RM

Companies use real activi-ties 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 subse-quent firm performance in case the targets are met

Moorman, Wies, Mizik and Spencer (MS, 2012)

To reveal the impact of stock price on strategic timing of innovation introduc-tions by public com-panies

Secondary sources: Datamonitor’s Prod-uct Launch Analyt-ics (product intro-ductions in FMCG: food, drug and mass

Panel probit model, calen-dar time port-folio approach (Fama-French model aug-

Likelihood of adopting the ratch-et strategy; abnor-mal returns

Dummy variables: own-ership status, industry, year, number of intro-duced innovations; re-turn diff. btw. big and small cap. stock portfo-

Public companies tend to strategically time their in-novations/new product in-troductions to achieve a higher stock price. For this, an increasing pace of inno-

38

retailers), Com-pustat, CRSP etc. in years 1995-2007, 30223 observations

mented with momentum factor), survey

lio, high and low book-to-market stock portfo-lio, high and low past stock returns portfolio

vations towards he end of fiscal year is necessary

Impact on price related decision variables

Graham, Harvey and Rajgopal (JoAE, 2005)

Investigate the im-portance of earnings benchmarks, will-ingness for real ac-tivities manipulation

Survey answers from 312 executives, 40-90 min inter-views with 20 senior executives

Survey, field interviews

- - Companies are reporting higher prices for the next period to increase sales in the current period, price discounts to boost sales

Roychow-dhury (Jo-AE, 2006)

To investigate if managers are under-taking real activities (price reduction) to manage earnings upward

Annual firm data from COMPUSTAT 21758 firm-years in 1987-2001, excluded are regulated indus-tries, banks, finan-cial institutions

Cross-sectional re-gressions mode, regres-sion model

Cash flow from operations as a percentage of as-sets; abnormal CFO

Total assets at the end of the period, sales during the period; indicator variable for suspect firm years, control variables (size, MTP, net income)

Companies use price dis-counts and offer better cred-it terms to rise sales and meet earnings targets

Chapman and Steen-burgh (MS, 2011)

Investigation of earnings manage-ment through mar-keting actions to meet benchmarks

ERIM: purchase patterns of 2500 households in 1985-1988; 114870 obser-vations; financial data: Compustat, Thompson Finan-cial, One Source: soup and yoghurt manufacturers

Logistic re-gressions

Occurrence of special price; % change in mean price between months

Dummy variables for the case the purchase oc-curred 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 dis-counts at the end of fiscal years to meet earnings tar-gets, price discounts are deeper than normally at the end of the fiscal year

Impact on place related decision variables Markovitch, Steckel, Yeung (MS, 2005)

To investigate the impact of stock price on marketing deci-sions. Types of deci-sions undertaken in

Lexis-Nexis, Dow-Jones Interactive, ABI/Inform, SDC Platinum, company annual reports;

Negative bi-nominal dis-tribution re-gression

Number of chang-es in distribution strategy

Firm’s annual stock returns, distributional changes of relevant competitors, changes in firms cash flows, firm

Companies, which under-perform the industry on the stock market, make more changes to their distribution in contrast to industry out-performing com-

39

Source: Composed by the author

response to stock price changes

Pharmaceutical in-dustry: 1980-2000.

value, dummy variables for year and firm

panies, which make fewer changes to their distribution networks.

Impact on promotion related decision variables Markovitch, Steckel, Yeung (MS, 2005)

To investigate types of activities under-taken in response to stock price changes

Lexis-Nexis, Dow-Jones Interactive, ABI/Inform, SDC Platinum, company annual reports: 1980-2000

OLS regres-sion

Detailing effort

Firm’s annual stock returns, competitors actions, changes in cash flows, firm value, dum-my variables for year and firm

Companies, which under-perform the industry, lay less effort on detailing (per-sonal selling) due to re-source constraints

Mizik, Ja-cobson (MS, 2007)

Investigation of pos-sible myopic market-ing management of firms at time of SEO

Thomson Financial Securities database, COMPUSTAT, CRSP, firms issuing SEO 1970-2001, 2238 observations

Fixed-effects multivariate time-series panel data model

Change in market-ing intensity

Change in ROA Firms lower their marketing expenditures during the year of SEO to inflate earn-ings

Chakravarty and Grewal (MS, 2011)

To investigate the willingness to de-crease marketing spending in order to avoid earnings short-falls and thus falling stock prices.

COMPUSTAT, Center for Research and Security Prices: 309 single business unit firms from four technology manu-facturing industries, 8915 observations in 1995-2009

BVARX esti-mation proce-dure, content analysis

Change in market-ing budget, change in R&D budget

Past abnormal stock returns, past stock vola-tility, control variables: cash flows, volatility in cash flows, dummy vari-ables: firm’s stock price in relation to industry’s average, industry owner-ship, leverage

Majority of companies in-creases marketing budget as a result of increased stock returns. Resources are allo-cated in directly value-creating activities like pro-motions and distribution

Chapman and Steen-burgh (MS, 2011)

To investigate shifts in retail-level mar-keting actions in order to time con-sumer purchases and manage earnings

Supermarket scanner data (purchase pat-terns of 2500 house-holds) and firm-level financial data, 1985-1988; 114870 obs.

Logistic re-gression

Occurrence of feature and display advertising

Dummy variables: pur-chase time (end of fiscal quarter/year), company missed EPS benchmark in the last quarter

Majority of promotional activities of FMCG that can be stockpiled, are shifted to the end of reporting periods to be able to manage earn-ings

40

3.2 Factors influencing the impact of the stock price Among possible impacts, what the stock prices can have on different marketing decision vari-

ables, prior research has identified the existence of specific factors, which shape the magni-

tude 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 magni-

tude 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 envi-

ronmental, organizational and decision-specific factors (Rajagopalan, Rasheed, Datta, 1993,

352). In this paper, the focus lies on organizational and environmental factors, whereby or-

ganizational 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 man-

agement 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 characteris-

tics (Hitt, Tyler, 1991, 339) and possible personal gain for the decision makers will be deter-

minative 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 vari-

ables 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 deci-

sions (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 compa-

ny 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 move-

ments 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 per-

formance pressure and likely to not meet earnings targets set by analysts (Mizik, 2010, 595;

Graham, Harvey, Rajgopal, 2005, 5; Markovitch, Steckel, Yeung, 2005, 1469f; Roychow-

dhury, 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 de-

pendent 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 man-

ager’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 interest-

ed 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 capi-

tal (Stein, 1989, 661). Therefore, managers of bigger companies can be less troubled by inves-

tor 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’, in-

cluding 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 deci-

sion 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 pro-

vide 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 di-

vided 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 mar-

kets 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 envi-

ronmental 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

Organizational factors

Performance of the com-pany, likelihood of meet-ing earnings targets

Size of current and past earnings, EPS

Financial statements

Mizik, 2010; Graham et al., 2005; Mar-kovitch et al., 2005; Roychowdhury, 2006.

If company is likely not meeting earnings targets, likelihood of changing marketing decision variables is higher

Firm stock market scruti-ny

Number of analysts in av-erage following the firm

I/B/E/S data-base

Moorman et al., 2012 Companies under greater stock market scrutiny are more likely to me managed by stock market incen-tives and use a ratchet strategy

Time, e.g. position in fiscal calendar

Quarters, months Financial statements

Chapman, Steen-burgh, 2011

Companies are more likely to change their market-ing decision variables during the last quarter, at the end of the fiscal year

Dependence of top man-agers compensation from the stock price

Percentage of the compen-sation tied to the stock price

Employment contract

Mizik, 2010 The personal motivation of the manager to concen-trate on short-term stock results affects the willing-ness to prioritize short-term results

Occurrence of specific events like LBO, SEO

Occurrence of the event Press-releases, newspapers

Mizik, Jacobson, 2007 During LBO and SEO, the company is especially interested in high stock prices, whereby marketing decision variables are subordinated to this goal

Size of the company Size of cash reserves and slack resources

Financial statement

Chakravarty and Grewal, 2011

If the company holds high cash reserves and its slack resources are relatively big as well, the com-pany has a greater independence from equity capital and investors content.

Environmental factors Industry concentration Amount of companies in

the industry, relative mar-ket shares

Market re-search

Chakravarty, Grewal, 2011; Moorman et al., 2012

The higher is the industry concentration, the greater the independence from equity capital and investors content; the lower is the motivation to ratchet

Source: Composed by the author

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, com-

panies 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 doc-

umented 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. Evi-

dence of overproduction at the end of the fiscal year in the ambition to lower COGS is pre-

sented (Roychowdhury 2006), which can, however, lead to difficulties in disposing of over-

produced items in the next period. From a controversial point of view, delaying of new prod-

uct 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, Sila-

Risso, 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 atten-

tion 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 com-

panies 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 com-

prehensible 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 de-

crease 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 advertis-

ing expenditures, others have analyzed either the state of discretionary expenses, which addi-

tionally 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 per-

spective, 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 manag-

ers 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 long-

er time period, they may influence companies’ own sales in the next period negatively. Ex-

ecutives 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 peri-

ods 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 contrib-

ute to higher sales are also captured by empirical findings. Compared to price reductions, ad-

vertisements 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 ex-

pectations 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 mar-

keting 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 short-

term 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 com-

panies, 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 pro-

vide a systemized overview of previous empirical results on the impact of stock price on mar-

keting 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. Second-

ly, 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. Addi-

tionally, 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 de-

pendent 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 re-

sources, 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 mak-

ing 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 par-

ticular 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 maintain-

ing 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, com-

panies 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 con-

sidering 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 irre-

sponsible 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 un-

dertake 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 compa-

nies’ managerial decisions. Ultimately, however, decisions to undertake rapid short-term ac-

tivities 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 non-

financial 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 fu-

ture 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’ suc-

cess 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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58

Appendix Appendix 1. Formation of Analysts’ Earnings Forecast

Source: Leans on Athanasakou, Strong, Walker, 2011, 62

EPS (-1) EPS0 EPS1 announced announced announced

Analysts forecast EPS0 Analysts forecast EPS0 Analysts forecast (AF0beg) and EPS1 (AF0pre) EPS1 (AF1post) (AF1beg) Analysts forecast EPS0 (AF0YE)

Year-end(-1) Year-end (0) t Year-end (1) AF0beg AF0pre EPS0

REV SURP AF0beg AF0YE AF0pre

REVYE REVPE

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

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.

% o

f inn

ovat

ions

intro

duce

d

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: Greta Kingola Date of birth: 01.12.1989 Nationality: Estonia Address: Tööstuse 47a-4,

10416 Tallinn Telephone: 00372 56467570 Email: greta.kingola@gmail.com

Education

Since 10. 2012 University of Cologne, Major Marketing Rochus and Beatrice Mummert-Foundation scholarship

holder 2009 – 2012 Tallinn University of Technology, Bachelor in Business Ad-

ministration, Major Marketing 18.10.2010 – 30.08. 2011 Ludwig-Maximilians-University Munich, Major Marketing 01.09.1998 – 19.06.2009 Tallinn German Gymnasium, Graduation with Deutsches Abitur

and Estonian State exams. Gold medal for excellent results.

Employment history/Internships

Since 03.2014 Consultant at Communication agency In Nomine OÜ in Tal-linn

01.2014 – 03.2014 Management Trainee at ERGO Insurance Baltic Strategy divi-sion

09.2012/03.2013/09.2013 Internship at In Nomine OÜ in Tallinn 09.2011 – 09.2012 Board Member at the NGO SENT (Starting Entrepreneurs

Network for Tomorrow) 09.2011-09.2012 Group-leader of innovation camps at Estonian Disaincentre 08.03.-30.08.2011 Marketing internship at Sun International GmbH in Mu-

nich Since 10.01.2010 Member of the Student Council at Tallinn University of Tech-

nology 07.2008 Internship at Stiftung Leuchtfeuer in Cologne 09.2007-06.2008 CEO of the Student Company Information & Memories 3.

Place at the competition “Best Student Company n Estonia 2008”

63

Additional Qualifications

10.2013 Group-leader and organizer of a business-camp by Junior Achievement Estonia in Republic of Moldova

08. 2012 Conference „On the Edge of Success“ in Porto, Portugal 2010-2011 Project „Europa macht Schule“ in German schools 05.2010 “European Innovation and Creativity Camp” 2010 in Brussels,

Belgium 11. 2008 Conference „Crossing Borders in Thinking and Acting“ in Copenhagen, Denmark 10. 2008 Course „Money, banks and financial markets“ at Estonian Busi-

ness School Languages

Estonian Mother language German Very good English Very good Finnish Weak Russian Weak Additional information

Driver’s licence Class B Interests Tennis, Skiing, Travelling, Reading