A Comparison of Excess Stock Market Return to Standard Marketing Metrics

A Comparison of Excess Stock Market Return to Standard Marketing Metrics

Vicki Lane (University of Colorado – Denver, USA) and Madhavan Parthasarathy (University of Colorado – Denver, USA)
DOI: 10.4018/978-1-5225-4754-9.ch002

Abstract

Marketing metrics provide measures of the impact of various marketing strategies. This paper examines excess stock market return as a potential measure to include in the metric arsenal. Excess stock return reflects investors' views of the likely impact of a particular strategy. Investors form expectations about how the strategy will affect future cash flows. Consequently, a stock's price changes to reflect investor “votes” about the strategy's impact on firm value. By tapping into event study techniques for measuring the impact of an announcement, firms can better understand the value of a particular marketing strategy. An assessment of various marketing measures indicates that excess stock market return compares favorably to other 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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Background: Excess Stock Return And Financial Theory

Present Value Model and Event Study Method

Researchers in finance and accounting have long used the stock market for scholarly research (Fama, et al., 1969). Such a study is labeled an “event study” because the researcher examines how the stock market reacts to (values) a public announcement of a particular “event”. Financial scholars have studied announcements of stock splits, regulatory changes, and accounting procedures.

A principle of event study is that investors together assess a firm’s value. This value is equal to the present value of discounted future cash flows of the firm1. Firms have long used the present value model to determine the value (V) of all types of assets (e.g., Francis 1980). This model recognizes that assets are valuable because they generate positive cash flows into the future (Ft). The model also acknowledges that earnings in the future are not worth as much as they are today, so they are discounted by a rate of return (r) that factors in risk (economy, inflation). The present value model is:

(1)

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