Clicky

Advertising Bolsters Firm Value after Shareholder Complaints - Ideas for Leaders
Idea #765

Advertising Bolsters Firm Value after Shareholder Complaints

This is one of our free-to-access content pieces. To gain access to all Ideas for Leaders content please Log In Here or if you are not already a Subscriber then Subscribe Here.
Main Image
Main Image

KEY CONCEPT

Shareholder complaints reduce firm value. A study shows how firms successfully combat this effect by increasing their advertising. However, turning to advertising should not be the first step in response to what might be legitimate shareholder concerns. 


IDEA SUMMARY

Shareholders can submit complaints to publicly-traded companies on a broad range of topics, including poor financial performance, poor governance, dissatisfaction with the firm strategy, or a controversial change in leadership, to name but a few. These complaints are then discussed at the next meeting. 

Complaints from shareholders are likely to have a negative impact on firm value. A study of nearly 4,000 shareholder complaints submitted to S&P 1500 firms between 2001 and 2016 reveals that in an effort to reduce this negative impact, companies will increase their advertising after a complaint is filed. This response, the study shows, is nearly always successful in mitigating the damage to the firm value caused by a shareholder complaint.

Not all complaints will carry the same weight. Complaints that don’t deal with financial concerns (for example, complaints about the firm’s environmental practices), or that concern topics covered extensively by the media (for example, supplier labour practices) are more likely to impact the firm’s value — and as a result, are more likely to spark significant investment into new advertising. Complaints from institutional shareholders will attract a similarly strong response from the firm. Less threatening shareholder complaints will spark a less intensive advertising response.

The data for the study was gathered from a variety of sources, including RiskMetrics, which maintains a database of shareholder complains; Kantar Media, which tracks advertising expenditure; LexisNexis for data on media attention to shareholder complaints; and Compustat for firm value data. Firm value was measured based on Tobin’s q theory of investment.


BUSINESS APPLICATION

Although companies respond to shareholder complaints with increased advertising in order to bolster firm value, the question remains: what about the complaint? Many companies do little to address the complaint, especially if it’s not from an institutional investor or on a subject the media will want to write about. The first step in the face of any complaint should be to assess whether the complaint has any merit, and if so, to take the necessary steps to address the complaint. 

The second step is to take action to mitigate any damage to the firm value resulting from the complaint. As shown in this study, increasing advertising is effective in countering the potential damage of a shareholder’s complaint. However, further analysis shows that most companies under-invest in advertising after a shareholder complaint, except when the shareholder is a major institutional investor, the topic of the complaint is non-financial, or the topic is liable to attract media attention. Be aware of this tendency: advertising is a potent response to the potential damage of a shareholder’s complaint, however, especially if the threat is seen as minimal, you may not be taking full advantage of this tool.

Another consideration is what type of media to use in your advertising campaign. Additional research in this study indicates that television advertising and outdoor advertising are, to a small extent, the best mediums to use. There’s a short-term, immediacy to television advertising that works well for a quick response strategy. Television advertising also makes an emotional appeal to consumers which helps tie them to the firm (in spite of any complaint). Outdoor advertising is excellent for increasing awareness and broadening visibility for the firm. 

Finally, it’s important to coordinate any advertising campaign with other key related functions, such as public relations. 


  • SHARE


FURTHER READING

  Simone Wies’ profile at Goethe University
  Arvid Oskar Ivar Hoffmann’s profile on LinkedIn
  Jaakko Aspara’s profile at Hanken School of Economics
  Joost M.E. Pennings’ profile at Maastricht University

REFERENCES

Can Advertising Investments Counter the Negative Impact of Shareholder Complaints on Firm Value? Simone Wies, Arvid Oskar Ivar Hoffmann, Jaakko Aspara & Joost M.E. Pennings. Journal of Marketing (July 2019). 

Ideas for Leaders is a free-to-access site. If you enjoy our content and find it valuable, please consider subscribing to our Developing Leaders Quarterly publication, this presents academic, business and consultant perspectives on leadership issues in a beautifully produced, small volume delivered to your desk four times a year.

FIND OUT MORE HERE

Idea conceived

July 1, 2019

Idea posted

Apr 2020
challenge block
Can't find the Idea you are after?
Then 'Challenge Us' to source it.

SUBSCRIBE TO IDEAS FOR LEADERS AND ACCESS ALL OUR IDEAS, PODCASTS, WEBINARS AND RECEIVE EXCLUSIVE EVENT INVITATIONS.

For the less than the price of a coffee a week you can read over 650 summaries of research that cost universities over $1 billion to produce.

Use our Ideas to:

  • Catalyse conversations with mentors, mentees, peers and colleagues.
  • Keep program participants engaged with leadership thinking when they return to their workplace.
  • Create a common language amongst your colleagues on leadership and management practice
  • Keep up-to-date with the latest thought-leadership from the world’s leading business schools.
  • Drill-down on the original research or even contact the researchers directly

Speak to us on how else you can leverage this content to benefit your organization. info@ideasforleaders.com