Billions are spent each year on advertising in an attempt to influence our opinions of brands in one way or another. The rise of social media and 24 hour news has to an extent made that a trickier endeavour than was previously the case, but this hasn’t stopped brands attempting to buy their way out of a crisis.
Does it work though? That was the question posed by a new study conducted by the University of Georgia. The researchers looked at nearly 150 companies over a five year period to see how they responded to news stories about them.
They found that when the stories were positive, companies that spent more on advertising saw bigger jumps in their stock price. The reverse was not the case however, with high ad spending not doing anything to mitigate the impact of a bad news story.
“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 Coca-Cola Company Chair 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.”
So what helps soften negative blows?
Well, the researchers found that marketing was far more effective at mitigating bad news than advertising. For instance, companies that have strong social media communities were found to utilise them to effectively limit any damage from bad news.
“In the article, we cite an example of a story about McDonald’s charging minority customers more than others. They immediately took action and put out news on Twitter and other online forums to assure people right off the bat that this was just a rumor that it was untrue, and it just squashed the rumor,” Xiong said. “If they had not done that, the rumor could have cost the firm quite a bit of money. And they knew where to reach the key influencers in their customer base because of the strong marketing capability that they had built.
So, the moral of the story is that spending money can help expand the reach of good news through greater awareness building, but only exceptional relationships with customers can mitigate bad news situations, with investors responding to companies who do this well by supporting their stock. If anything, the researchers contend that companies should do more to highlight these capabilities so that external investors are as aware of the good work that’s happening as internal ones.