Measuring the Financial Value of Marketing Strategy with Excess Stock Market Return

Measuring the Financial Value of Marketing Strategy with Excess Stock Market Return

Vicki Lane (University of Colorado, Denver, CO, USA)
Copyright: © 2014 |Pages: 16
DOI: 10.4018/ijrcm.2014100101
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Abstract

This paper proposes excess stock market return as a way to measure the impact of marketing strategy on firm value. First, it provides an overview of event study method. An event study examines the excess return to a firm's stock price after the release of information that is relevant to the firm's financial success. Second, it shows how excess return captures a marketing strategy's impact on firm value. It presents a model that illustrates how a marketing strategy impacts consumers, future cash flows, firm value, investor's expectations, and excess return. Third, a comparison shows that excess return stacks up well against standard marketing metrics. Excess return yields unbiased estimates, allows direct causal inference, is future oriented, includes all cash flows, accounts for opportunity costs, factors in risk, and takes into account the time value of money.
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Introduction

Measuring the Financial Value of Marketing Strategy with Excess Stock Market Return

There is an old saying in marketing, half of the marketing budget works, half does not, but it is not clear which is which. Most companies do not base marketing strategy on data-driven metrics (Jefferey, 2010). At the same time, there is growing interest in measuring a marketing strategy’s financial impact. Of the firms that use metrics, market share is often the financial metric that guides decisions (Farris, et al., 2010). Less often, firms look at ROI. Yet, neither metric fully portrays the financial value of marketing strategy (Fisher, 1984; Jacobson, 1987; Lev, 1980). Thus, experts call for measures that capture the return on marketing investment (Day & Fahey, 1988.) This paper describes how to measure the financial value of marketing strategy with excess stock market return. First, it provides an overview of event study method. An event study examines the excess return to a firm’s stock price after the release of information that is relevant to the firm’s financial success. Second, it shows how excess return captures a marketing strategy’s impact on firm value. It presents a model that illustrates how a marketing strategy impacts consumers, future cash flows, firm value, investor’s expectations, and excess return. Third, a comparison shows that excess return surpasses standard marketing metrics in vital ways.

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