When a firm becomes the subject of a news story, its stock price usually is affected. Whether positive or negative, newly publicized details about a company tend to attract investor attention and move the stock price based on the article’s sentiment.
In the past, managers have been hard-pressed to respond appropriately. But new research from the Terry College of Business and published in the Journal of Marketing Research shows that two in-house tools can influence the effects of news reports on stock price.
The article examined 141 firms over about five years, finding that when news reports highlighted positive news, firms with higher advertising levels experience a stronger increase in their stock prices. When negative articles are published, however, advertising doesn’t mitigate the dysfunctional effects. In those instances, firms with strong marketing capability can better calm customer and investor fears.
“People have talked about the fact that investors tend to buy better known stocks, but nobody really talks about how that link happens,” said Sundar Bharadwaj, co-author of the paper and the Coca-Cola Company Professor of Marketing at UGA. “What we are able to show is that the way advertising operates is by increasing individual investors’ attention and interest in the stock. We show that when there’s good news and the company advertises that good news, we find that Google searches for the ticker symbol of the company go up, but not for the company name. Unlike a big institutional buyer who is well aware of the symbol, it’s the individual buyer who searches for ticker symbol. So we can see that, all of the sudden, a lot more people are buying the stock.”
Bharadwaj, who co-authored the paper with fellow UGA marketing professor Guiyang Xiong, added that when negative news breaks about a firm, advertising does not help, but marketing capability can soften the detrimental impact of such news on stock price.