Natalie Mizik

Trading Off Between Value Creation and Value Appropriation: The Financial Implications of Shifts in Strategic Emphasis

Firms allocate their limited resources between two fundamental processes of creating value (i.e., innovating, producing, and delivering products to the market) and appropriating value (i.e., extracting profits in the marketplace). Although both value creation and value appropriation are required for achieving sustained competitive advantage, a firm has significant latitude in deciding the extent to which it emphasizes one over the other. What effect does strategic emphasis (i.e., emphasis on value creation versus value appropriation) have on firms financial performance? The authors address this issue by examining the effect that shifts in strategic emphasis have on stock return. They find that the stock market reacts favorably when a firm increases its emphasis on value appropriation relative to value creation. This effect, however, is moderated by firm and industry characteristics, in particular, financial performance, the past level of strategic emphasis of the firm, and the technological environment in which the firm operates. These results do not negate the importance of value creation capabilities, but rather highlight the importance of isolating mechanisms that enable the firm to appropriate some of the value it has created.

Are Physicians Easy Marks? Quantifying the Effects of Detailing and Sampling on New Prescriptions

Much public attention and considerable controversy surround pharmaceutical marketing practices and their impact on physicians. However, views on the matter have largely been shaped by anecdotal evidence or results from analyses with insufficient controls. Making use of a dynamic fixed-effects distributed lag regression model, we empirically assess the role that two central components of pharmaceutical marketing practices (namely, detailing and sampling) have on physician prescribing behavior. Key differentiating features of our model include its ability to (i) capture persistence in the prescribing process and decompose it into own-growth and competitive-stealing effects, (ii) estimate an unrestricted decay structure of the promotional effects over time, and (iii) control for physician-specific effects that, if not taken into account, induce biased coefficient estimates of detailing and sampling effects. Based on pooled time series cross-sectional data involving three drugs, 24 monthly observations, and 74,075 individual physicians (more than 2 million observations in total), we find that detailing and free drug samples have positive and statistically significant effects on the number of new prescriptions issued by a physician. However, we find that the magnitudes of the effects are modest.

The Theory and Practice of Myopic Management

This article reviews the theory and empirical evidence of myopic management as it pertains to marketing practice. It documents empirically the stock markets inability to properly value marketing and innovation activity in the face of the potential for myopic management. The author assesses the total financial consequences of myopic management (the practice of cutting marketing and research-and-development spending to inflate earnings) and finds that myopia has a long-term net negative impact on firm value. Myopic management is contrasted with accounting accruals-based earnings inflation, and the author shows that the real activities (i.e., myopic management), and not the accounting numbers manipulation, have the greater negative impact on future financial performance. These results are consistent across alternative abnormal return measures and alternative benchmarks. The author argues that shareholders, managers, and marketing researchers can play a role in limiting myopic management practices.

The Financial Markets and Customer Satisfaction: Reexamining Possible Financial Market Mispricing of Customer Satisfaction

We investigate the association between information contained in the American Customer Satisfaction Index (ACSI) metric and future stock market performance. Some past research has provided results suggesting that the financial markets misprice customer satisfaction; i.e., firms advantaged in customer satisfaction are posited to earn positive future-period abnormal stock returns. We reexamine this relationship and find that statistically significant evidence of financial market mispricing of customer satisfaction is limited to firms in the computer and Internet sector. The results suggest that the mispricing anomaly reported in past research appears not to stem from a systemic failure of the financial markets to impound the financial implications of customer satisfaction into current stock price, but rather from abnormal returns achieved by a small group of satisfaction leaders in the computer and Internet sector over the period of study. Analyses based on unconditional risk covariates and analyses using conditional risk covariates estimated from short-window, high-frequency data support this finding.

Valuing Branded Businesses

The authors develop and validate a conditional multiplier approach for valuing branded businesses. The approach enhances traditional multiplier-based valuation by explicitly incorporating brand characteristics into the model. The authors present theoretical arguments why, develop a model to demonstrate how, and provide an empirical illustration to show that brand assets are not fully reflected in contemporaneous margins, and therefore valuation accuracy can be improved by incorporating information about the properties of the firms brand asset directly into a valuation framework. The authors find that brand metrics have statistically significant associations with valuation multipliers and add incremental explanatory power to accounting variables in explaining valuation multipliers. Out-of-sample analysis shows a 16% improvement in the mean absolute error for predictions that take into account brand metrics compared with predictions based on accounting variables alone.

Assessing the Total Financial Performance Impact of Brand Equity with Limited Time- Series Data

One of the key challenges in empirically modeling the total impact of marketing assets on financial performance is the limited availability of marketing metrics data over time. The author presents an approach for estimating the total financial impact of marketing assets with limited time-series data and demonstrates the approach with an application to brand equity research. Consistent with prior research, the aggregate analyses indicate that brand equity, as measured by customer mindset metrics, positively affects current financial performance. In addition, the author documents brand equitys significant and much greater impact on the firms future financial performance: at the aggregate, only a small portion of the total financial impact of brand equity is reflected in current-year profits, whereas the bulk of the profitability impact is realized in the future. Most importantly, however, the analyses document significant heterogeneity of these effects: in some industries, the entire direct impact is contemporaneous, whereas in others, no contemporaneous effects are observed and all of the profitability impact occurs in the future.

Firm Innovation and the Ratchet Effect Among Consumer Packaged Goods Firms

We consider how public firms influence their stock market valuations by timing the introduction of innovative new products. Our focus is on innovation ratchet strategy---firms timing the introduction of innovations in order to demonstrate an improvement in the number of introductions over time. We document that public firms use an innovation ratchet strategy more often than do private firms and that the stock market rewards public firms for doing so. These rewards from the stock market, however, come at the expense of performance in product markets. Specifically, because firms using an innovation ratchet strategy delay some product introductions, they have significantly lower sales growth in the year they ratchet. Finally, we identify firm and market characteristics that influence the likelihood that a public firm will engage in an innovation ratchet strategy.

Rejoinder---Customer Satisfaction-Based Mispricing: Issues and Misconceptions

We appreciate the opportunity to respond to the commentaries and additional analyses by Fornell et al. [Fornell, C., S. Mithas, F. V. Morgeson III. 2009a. The economic and statistical significance of stock returns on customer satisfaction. Marketing Sci. 28(5) 820--825] and Ittner et al. [Ittner, C., D. Larcker, D. Taylor. 2009. The stock markets pricing of customer satisfaction. Marketing Sci.25(5) 826--835]. Both studies have multiple theoretical and econometric limitations that challenge the validity of their arguments and findings (e.g., neither study allows for time-varying risk factor loadings in their assessments of mispricing although the composition of firms in their analyzed portfolios changes over time, Fornell et al. mischaracterize the efficient markets hypothesis, and Ittner et al. do not use standard panel data econometric methods and models). Generalizations about customer satisfaction, like any other construct, should be assessed by appropriate econometric methods and should withstand rigorous scrutiny. We believe an open, frank dialogue can help clear up misconceptions, air central issues, and advance better understanding of methods and analyses for assessing the financial market implications of marketing metrics such as customer satisfaction.

The Unappreciated Value of Marketing: The Moderating Role of Changes in Marketing and R&D Spending on Valuation of Earnings Reports

Because current earnings predict future financial performance, the stock market reacts strongly to earnings announcements. How rapidly and in what manner information about marketing actions and strategies is accounted for in the stock valuation is less clear. We examine the financial markets ability to fully and timely value marketing-related information released along with quarterly earnings announcements. We find evidence consistent with the market initially under-appreciating marketing and R&D effort. Specifically, we find differences in the immediate market response to earnings announcements for firms expanding versus reducing their marketing and R&D effort. However, we also observe a significantly greater positive stock price drift (i.e., systematic stock price adjustment) in the months following an earnings announcement for firms increasing marketing and/or R&D expenditures. We examine the dynamics and the mechanism underlying this differential drift. Firms increasing their marketing and/or R&D spending report significantly greater future operating performance than firms decreasing their marketing and R&D spending and the stock price adjustment (drift) accelerates around the time of the subsequent earnings announcement. Our findings suggest that the stock market takes time to fully incorporate implications of strategic marketing decisions. They also suggest the stock market tends to update firm valuation when the outcomes of marketing strategies are realized in future financial performance and new performance signals are sent to the market.

Value Implications of Corporate Branding in Mergers

The choice of post-merger corporate branding is a major strategic decision. It serves as a signal about the positioning and strategic intent of the new merged entity to the key stakeholders—customers, employees, and investors—affecting their ensuing behavior. We investigate the financial markets reactions and future operating performance implications of this decision. We classify merger transactions into three groupings according to the post-merger corporate branding: assimilation (the identity of the target company is discarded and it is rebranded with the acquirer’s name and symbol), business-as-usual (both firms continue to operate under their own corporate names and symbols), and fusion (elements of both corporate brands are maintained in a new brand). We find significant differences in the merger valuation across branding strategies. The stock market reaction to fusion is more positive than to assimilation and business-as-usual-branded merger announcements. Our analyses of post-merger sales, operating costs, and survival rates help explain these differences in merger valuation. Our analyses address selection and endogeneity issues, allowing for a causal interpretation of these findings. They provide support for the “brand-is-an-asset�? versus the “signaling�? perspective on the role of brands. Interestingly, we also find that the well-documented M&A mis-pricing phenomenon is primarily driven by the business-as-usual-branded mergers.