An Economic Study Conducted by Freie Universität Berlin and the University of Connecticut
No 054/2019 from Mar 12, 2019
According to a study, the market value of a company can rise if it reacts quickly to negative publicity from a celebrity endorser. The study by Professor Sascha Raithel from Freie Universität Berlin and Professor Stefan J. Hock from the University of Connecticut shows that if a company responds to an endorser’s gaffe within 72 hours, their market value can increase by 2.1% over the next four weeks of trading. However, a slower reaction time can lead to a loss of 1.9% over the same period. The professors examined how different reaction times to negative publicity affected companies’ stock market value. They also analyzed how a company’s response additionally affects their market value based on whether they further support the endorser or chastise the person for the behavior that generated bad publicity. The results of the study were published in Management Science .
Celebrities can damage their sponsors’ brands if they draw attention to themselves for misdeeds, such as drug abuse, politically incorrect statements, or bodily injury. Until now, little was known about the economic effects of a company’s response to negative publicity. The researchers looked at 128 incidents between 1988 and 2016 and examined how they influenced the economic position of the sponsoring companies in 230 cases, depending on how the company reacted to the negative publicity.
The results showed that it is better when a company reacts in some way or another, as opposed to not reacting at all. Unfortunately, most companies tend to remain passive and do not respond to negative publicity or respond much too late, according to the study. The findings also show that companies should take into account several factors when deciding what type of response to pursue (whether to support the endorsers or to reprimand them) in order to positively influence public opinion. The impact on the company can depend on how strongly an endorser is to blame and how closely the endorser’s occupation and the brand are related. Another factor is how the endorser responds to the incident, for example, if they offer an apology. The results of the study can help companies gauge the consequences of their reactions to negative celebrity endorser publicity.
"Managing Negative Celebrity Endorser Publicity: How Announcements of Firm (Non)Responses Affect Stock Returns"
Sascha Raithel, School of Business and Economics, Freie Universität Berlin, Marketing Department, Tel.: +49 30 838-52135, Email: marketing [at] wiwiss.fu-berlin (p) de