The Information Content of Marketing Investments: The Case of Sales Force Resizing Announcements

Abstract

This paper is concerned with the ability of marketing investments to convey information from the “black box” of the firm to participants in the financial markets. We focus on the context of sales force resizing announcements in the pharmaceutical industry because the sales force comprises the main marketing instrument for firms in this industry. We hypothesize that sales force resizing announcements will generate a concomitant market reaction because they provide information about future demand. Moreover, we predict stronger absolute effects for “increase” announcements than for “decrease” announcements. This is because the mean-shifting and uncertainty reducing aspects of new information work in concert for increase announcements, but in opposing ways for decrease announcements. Our theory also predicts a more pronounced market reaction when investors are more uncertain about the firm’s future performance and the announcement contradicts the direction of investors’ prior beliefs. Employing an event-study analysis, we find an unusually strong two-day market reaction of 3.2% for increase announcements and no significant market reaction for decrease announcements. The hypothesized effects with respect to uncertainty and direction of investors’ prior beliefs are also supported. We conclude by discussing implications for managing the investor relations function.