A Model to Explain Shareholder Returns: Marketing Implications

market factors. A multistage model to explain the stock returns of a measures such as profitability and market share. For example, representative set of U.S. companies is developed. Monthly returns data for the strategy literature has primarily been concerned with how individual securities are obtained and the cross-sectional interdependencies organizations perceive the markets they operate in and make between securities are identified. The returns of the securities are found decisions regarding the posture to adopt in those markets to be related to at least three, and possibly four, factors. The hypotheses (Porter, 1980). The organization behavior literature, on the related these factors to broad economic aggregates such as cost and other hand, has focused on the contingent relationships besupply of money, in addition to the market return index. The presence tween design and performance. of idiosyncratic industry effect in the market is also demonstrated. The Based on the studies examining organizational performance replication of the analysis with another sample from a different time from the shareholder’s perspective, the general argument made period yields similar results. Marketing implications are drawn based on is that stock returns are idiosyncratic and cannot be predicted. the findings of this study. J BUSN RES 2000. 50.157–167.  2000 The focus of the present study is to address this assumption. Elsevier Science Inc. All rights reserved. Specifically, the present study develops a multistage model to explain the stock returns of a representative sample of companies listed in the New York Stock Exchange. In the first stage, the study uses capital asset pricing model (CAPM) Every organization has multiple stakeholders-employees, principles to evaluate the common variation in stock returns shareholders, and management, to name a few whose with the market return index. In the second stage, the study performance expectations may be different. Shareholduses a model based on the arbitrage pricing theory (APT) ers may believe that organizational performance is excellent suggested by Roll and Ross (1995) to identify and evaluate if the earnings per share is high; management may be satisfied the effects of two additional factors, namely the cost of money with a performance that meets internal rate of return, profitand the availability of supply of money. In the third stage, the ability, and market share requirements; and employees may study evaluates if there is a systematic variation in stock returns be satisfied if organizations have the ability to meet their with the industry to which a particular company belongs. salary and promotion expectations. The multiple constituency Empirical support for the conceptual model of the study perspective is best illustrated by Lloyds Bank which reported would indicate that stock movements are not idiosyncratic a big loss in 1989, yet the CEO claimed it was a good year and can, in fact, be predicted (Ferson and Harvey, 1991). The for the shareholders. significance of hypothesized factors in the present study may Most previous research on organizational performance has provide clear evidence of whether and to what extent movements in stock prices can be explained. Previous studies have shown the relationship between stock returns and measures of Address correspondence to V. Kumar, Marvin Hurley Professor of Business Administration, Melcher Faculty Scholar, Department of Marketing, College brand equity (e.g., market-to-book equity, corporate and brand of Business Administration, University of Houston, Houston, TX 77204-6283. Tel.: (713)-743-4569; fax: (713)-743-4572. E-mail address: [email protected] reputation). If so, subsequent studies can enable researchers to