Capital Market Returns to New Product Development Success: Informational Effects on Product Market Advertising

The authors aim to answer the following question: If the capital market reacts with abnormal stock returns to new product development success events, do these returns influence subsequent marketing decisions? Drawing on informational market feedback and managerial learning theories, the authors posit that when firms are uncertain about how responsive the product market will be to their marketing activities, signals received from the capital market help them update their beliefs about the product market’s responsiveness. In the pharmaceutical context, the authors decompose the abnormal returns at a new drug approval event into components that the firm can and cannot predict (i.e., predicted and unpredicted abnormal returns) and find that the postapproval advertising budget is larger when unpredicted abnormal approval returns are higher. Furthermore, this tendency is more pronounced for spending on detailing than for direct-to-consumer advertising. Consistent with these higher budgets, the authors find that postlaunch advertising is more effective when unpredicted abnormal approval returns are higher, particularly for detailing spending (vs. direct-to-consumer advertising). Overall, this study suggests that information flows from the capital market’s initial perceptions at new product introduction play an important role in subsequent marketing decisions in the product market.