Taking Stock Of Advertising
Does advertising affect share prices?
A few days ago, the stock price of an advertising holding company (full disclosure: one I used to work for, and of which I still hold some stock) dropped dramatically. Usually stock prices move a few percentage points, but this stock dropped about 30% in a morning, erasing one third of the company’s value in a couple of hours. That morning, the company confirmed that it was was still under investigation by the US Securities and Exchange Commission and that it hadn’t made its numbers that quarter. You may remember the [now former] CEO previously had to give back $20M in incorrectly claimed expenses, so investors have been a little skittish to say the least.
This got me thinking, and not just about my investment decisions. The value of stocks is not the same thing as the price of stocks — they are different measures calculated by different methods. This disparity is at the heart of stock market investing. The value of a stock is calculated by fundamentals of the business — including the value of the brand — and the price is whatever the stock is changing hands for. These are often similar, but not always, and leveraging what appears to be underpriced stocks is what value investing is all about.
But the price can change dramatically because investors act emotionally, like any consumer. Stock prices respond to changes very rapidly compared with other financial measures which build over time, and they also build in future values — that is to say, the market responds to future growth of sales and profits, discounted for risk, by building that supposed growth into the stock price.
What does this have to do with advertising? Well, we can see that stock prices change based on activity in the market that precipitates buying or selling of the stock in sufficiently large volumes.
Advertising is always looking to demonstrate its economic impact for companies, and ROI from short-term sales response doesn’t reflect the long-term impact, the subtle changes in price elasticity of demand, the double-jeopardy impact of dominant market share and so on. But, at least in theory, stock price does factor that in, in the present, because future growth is ‘priced in’. This suggests that stock prices might be the long-term financial measure most sensitive to advertising, which also works now and over time to create value.
There is very little research on the impact of advertising on share price. I couldn’t find any strong papers, even in the Warc database. In 2003, McDonald’s saw its first ever quarterly loss, in light of slipping sales attributed to becoming the poster brand for America’s obesity problem. Then it launched ‘I’m lovin’ it’ and saw quarterly sales jump by 8%, the largest jump in a decade. Eleven months after the campaign launched, the stock price had risen 26%, outperforming the S&P 500 by 18%. Since advertising increases demand and price premiums, which increase sales, revenue and profits, and since share price is often based on forward-looking opinion, could a single ad impact share price?
Looking at Super Bowl spots gives an indication that it might. Budweiser has won the USA Today Ad Meter several times in the last few years, and there have been corresponding jumps in the stock price each time. This is just anecdata however, so I was pleased to find a paper from the AMA’s Journal of Marketing that adds some rigor to my reflections. ‘The direct and indirect effects of advertising spending on firm value’ paper from the University of Central Florida supports the hypothesis that “advertising spending has a positive, long-term impact on own firms’ market capitalization and may have a negative impact on the valuation of a competitor of comparable size”.
So spending to drive salience has a positive and lasting impact on stock price, and there is some indication that ‘better’ commercials create a bigger uplift. Google research shows significant correlation between broadcast advertising and search volume and a paper from the Warwick Business School entitled ‘Quantifying trading behavior in financial markets using Google trends’ suggests that search volume can be used to predict the stock market.
More research is needed, but if you are planning advertising, I would add stock price to your basket of KPIs. You know it’s something your client is looking at closely and it reminds them that we understand their concerns. A jump — or drop — in stock price means a lot more to a CEO than shifts in brand measures.