Stock options as a means of adding value in business markets: A powerful potential communication vehicle for business marketing managers

Received (in revised form): 12th December, 2001

George S. Spais
is a PhD candidate in Marketing at the Panteion University of Athens, (Dept. Public Administration). His doctoral research is focused on marcoms (marketing communications), strategies review in Greek business markets and IMCs (integrated marketing communications) impact on organisational protability. He is a graduate of Athens University of Economics and Business (BA in Management Science & Marketing) with postgraduate studies in Technology Management and Education from the Open University, UK and the Hellenic Open University. He is also a holder of an advanced Studies Diploma in Technology Management (Joint Program: National Technical University of Athens and Athens University of Economics and Business) and a Diploma in Transport from the Chartered Institute of Transport, UK. He is a member of the American Academy of Marketing Science and teaches Marketing Strategy at the Business College of Athens. His research interests and publications are focused on business marketing (marcoms strategies and IMC).

George N. Filis
is a nancial researcher at Bournemouth University where he is writing a PhD thesis on options. He holds an MA in Financial Services from Bournemouth University and a BSc in Accounting and Finance from the University of Wales. His research interests are focused on nancial derivatives, specically options, and on the analysis of anomalies of emerging markets.

Abstract In this paper, the authors argue that stock options are a highly eective marketing communications (marcoms) medium, which due to their inuence on the protability of the organisation, possess characteristics that should be included in strategic marketing planning for nancial and non-nancial organisations. This study aims to test whether stock options can be used as a means for marketing strategists to build eective branding and loyalty programmes. It is argued that the strategic role of stock options in marketing decision making adds value in business markets. Stock options play a unique role in marketing and in the achievement of corporate goals and targets. The study is supported by the ndings of a questionnaire survey based on a sample of Greek companies, grouped into two categories. The rst category consists of the most protable organisations supplying business markets, listed on the Athens Stock Exchange (ASE) and the second consists of large nancial organisations. Keywords Information economics, information, business markets, marcoms strategies, branding, stock options

George S. Spais Panteion University of Athens, 41st Aristovoulou Street, Athens 11853, Greece. Tel: +30 (1)3410975; e-mail: gspais@hol.gr

INTRODUCTION If an organisation is unable to satisfy its shareholders, the business will lose

competitive advantage because shareholders act as opinion leaders. This role of shareholders is particularly important for businesses that supply non-

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consumer markets, where personal communication is the basis for long-term healthy relationships between suppliers and businesses.1 Investors, fund managers and analysts alike all share an interest in the quality, background and vision of a companys management. One needs only to note the turnover of CEOs at large, visible corporations to understand how management is scrutinised when times are bad for a company. In recent literature, the added value that marketers are looking for can be achieved through media that include interactivity as a basic characteristic. Such interactive media are considered to be the new technologies in communications (eg multimedia applications, web-based technologies etc). But can a product play the role of a communications vehicle? The authors argue that stock options are an interactive tool that can provide added value to an organisation in business markets. Variables such as product quality, credibility, reliability and (mainly) reputation2 may have a direct impact on the organisations protability.3 So the incorporation of a supplementary tool with a direct impact on the protability of the organisation provides a new weapon for marcoms managers. This view is supported by ndings such as the following: Option listings are positively related to rm size and stocks trading volumes, and negatively related to stock price volatility4 Option listings result in a signicant increase in transaction volume of the stock, due to increased hedging volume5 Option listing leads to a reduction in the volatility of the underlying asset.6 LITERATURE REVIEW The literature in this eld derives from the basic theory of information economics and

discusses how the meaning of information is directly related to marketing strategies. The original meaning of the word information according to Machlup (1983)7 derives from the Latin informare, which means to put in form. Informing therefore carries the sense of instruction, learning or imparting or much better to tell (one) of something. In the economics literature, information can take two forms: In traditional economies, information is viewed as a raw material used in a decision-making process to produce decisions and strategic choices. In this sense, information reduces uncertainty Information may also be viewed as a commodity. In this sense, it takes the form of a service or is incorporated in products. But how are these related to the strategic role of stock options? Those involved in marcoms planning have come to realise that the success of any programme depends largely upon the capability of the organisation to decode the perceptions of its customers. For a marcoms programme to be successful, organisations have to recognise the importance of positioning and the need to discover interactive media. According to Ries and Trout (1982):8 Positioning starts with a product. A piece of merchandise, a service, a company, an institution, or even a person . . . But positioning is not what you do to a product. Positioning is what you do to the mind of the prospect. That is, you position the product in the mind of the prospect. In the turbulent global market, a competitive organisation has to manage a complicated system of information ows.9 This is why business marketers are

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interested in how to promote information and which communication vehicles to use in order to transmit their message to the targeted audience. Such an approach requires the implementation of marcoms programmes and strategies in order for the organisation to meet its goals through the satisfaction not only of its customers, but also of its shareholders. If one thinks of an organisation as a communication source, then the organisation will have a certain degree of credibility as a communicator. Clearly, a good reputation in the minds of potential customers enhances the eectiveness of messages from a given source, while an unfavourable reputation reduces message eectiveness. Source eect is a measure of the extent to which the eectiveness of a message stays constant as the source is varied. The presence of source eect has been well established in communication in general10 as well as in business marketing in particular.11 Success in any market, whether consumer or business, depends on the organisations ability to create a unique position in the customers mind. Marketers accomplish this by carefully matching the customers needs and expectations with the organisations distinct competencies or advantages. It is well known in marketing theory that products and services make their own special contribution to the corporate image.12 A public relations strategy is concerned with developing a friendly public environment for the organisation. This means that the management must realise that being accepted by its customers and other stakeholders is the highest priority, in order to function successfully, both now and in the future. This intention is reected in the conrmation that these stakeholders should be considered when organisational strategies are formulated.13 The authors argue that nancial and investor relations should involve the

marketing and communications professionals in an organisation. Financial relations involve the same strategies and tactics as other areas of communication, such as targeting the right audience, carefully dening the message and the media used to distribute that message, and making sure both the nancial and marketing communications are working together. Increasingly, it also involves the use of several, if not all, communications tools, so that both the company and its traded stock can be distinctive. As with any product or service, competitive dierentiation is essential. By thinking of the company and its publicly traded shares as a product, innovative ways of dierentiating the shares must be found. Traditional methods do not dierentiate securities and public oerings any more than they dierentiate products and services. Periodic nancial statements cannot do the job alone. Discount securities retailers now handle a sizeable portion of the daily volume. The analyst community has declined in number because of budget cutbacks, thus leaving fewer analysts to report on more securities.1 As if that were not enough, the growth of non-stock investment (NSI) opportunities makes the equity market an even more dicult eld in which to compete. These factors impose on publicly held companies the need to direct more attention to the short-term aims of money managers, while trying to build long-term investor commitment through relationship marketing. The challenges can be summarised as follows: How can a companys shares be dierentiated from all the others? The use of all marcoms vehicles is essential if the message is to be communicated properly. This includes integrating the companys marketing message with the story on the companys stock, but it also includes positioning the management as a unique selling proposition.

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Among an organisations products that can have an impact on the corporate image are stock options. Stock options not only function as a promotional tool but also as a communication vehicle adding high credibility to the marcoms message and having a direct impact on the corporate image of the companys products. In order to position the companys shares as a sound long-term tool, both traditional and modern marcoms methods can be used to improve investor awareness of the investment opportunities. The usual tools are still important: annual and quarterly reports; media relations; road trips to see the analysts; employee communications; toll-free message lines; corporate image advertising; videos; cable; teleconferencing links, etc. Yet these tools must be tied up with a message that says this is a unique management team; a message that can be achieved by a supplementary tool, such as stock options. STOCK OPTIONS AS A MARKETING COMMUNICATIONS/INFORMATION TOOL IN BUSINESS MARKETS Researchers have concluded from empirical tests that stock options provide information related to the underlying stock, which are not yet incorporated in the stock price itself.1417 Transactions in the option market may, therefore, predict future movements of the underlying price. This is because informed traders choose to trade more in the option market so that this market reects the information rst. The information is only later incorporated into the underlying prices.18 Additionally, informational eciency may be improved as investors would not face the constraints of short selling (which causes informational ineciency). Such constraints on short selling cause negative information to be over-weighted to the market with the result that future share prices underperform with a direct impact

on the eectiveness of the marcoms programme. Apart from the additional information and informational eciency that stock options provide to the underlying stock, they also lead to higher transaction volumes for the underlying stock. Investors, instead of selling short, will buy puts and sell calls and this process will create greater transactional eciency.17 Stock option markets also improve the eciency to the underlying stock market and this is an important issue as certain markets (emerging ones mostly) are less able to process economic information than the stock markets of advanced economies. Stock markets need to be able to process information eciently in order to guide capital towards its best economic use.18 Cornelis (1998)19 analysed six Asian stock exchanges and found that the markets were not ecient as the information in the market was determined only from past prices, which is not in line with the Ecient Market Hypothesis. The opening of an option market provides greater price eciency to the stock market20 and the higher number of traded contracts in stock options markets makes the underlying market more complete.21 Also, rms that have listed options tend to adjust their stock prices faster.22 Shares with listed options also have less predictable drifts after any announcements.23 The transactional volume and the information intensity of stock options may also act as predictors of the future demand for the underlying stock.14,2430 So stock options, through their ability to import information to the market earlier than the underlying stocks, could create greater buying activity for the underlying asset. The justication for such a conclusion can be summarised in the fact that the share that has a listed option provides a greater amount of information to investors. The advantages that dierentiate stock options as a communication vehicle from

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others can be summarised as follows: high intensity of information means more added value to the shareholders high level of satisfaction of shareholders means more goodwill for the organisation greater share transaction volume adds reliability and credibility to the organisation. For these reasons, it is likely that stock options will aect a companys turnover and any instrument that aects a companys turnover should be included in the strategic marketing plan. METHODOLOGY The basic aim of the survey is to test the hypothesis, as identied in the literature review, that stock options can be used as a supplementary and eective marcoms vehicle in business markets. The authors collected data by means of questionnaires sent out to the marketing and nancial managers of a sample of organisations. The sampling frame consisted of organisations divided into two categories: (a) the most protable rms listed in ICAPs Directory and in the Athens Stock Exchange (ASE) and (b) the largest rms in the Greek nancial sector. The surveyed group of organisations listed in the ASE was based upon the National Statistical Centre of Greece and ICAPs Directory31 of Greek organisations, partly or fully selling to business markets. The sample of nancial rms was based upon the largest rms in the nancial sector, according to ICAPs Directory. The survey investigates both marketers and nancial managers perspectives of the research question. The reason for this approach is to discover whether marketing managers have realised the potential of stock options as supplementary and eective marketing communications vehicles, and whether nancial managers

believe that nancial tools can be used as a medium to increase the demand for the companys shares. In total, 34 completed questionnaires were received (17 from each category, a response rate of just over 50 per cent). This is a reasonable sample size, which should enable solid conclusions to be drawn. The statistical tool that was used for the analysis of the above questionnaire was the Pearson chi-squared test. The questionnaire included the following questions: 1. How would you rate your knowledge of stock options? (High, Low) 2. Do you believe that the use of communication media can increase the demand for shares? (Yes, No) 3. Do you believe that investors become more attracted to a companys shares when it has a listed option? (Yes, No) 4. Do you believe that stock options can be used as a marketing communication vehicle? If no, why not? (Yes, No) 5. Do you think that the nancial and marketing departments should cooperate? (Yes, No) FINDINGS The results of the survey are summarised in the following frequency tables: 1. How would you rate your knowledge of stock options? Marketing Financial All directors directors respondents High 6 9 15 Low 11 8 19 2. Do you believe that the use of communication media can increase the demand for a companys shares? Marketing Financial All directors directors respondents Yes 16 16 32 No 1 1 2

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3. Do you believe that investors become more attracted to a companys shares when it has a listed option? Marketing Financial All directors directors respondents Yes 15 12 27 No 2 5 7 4. Do you believe that stock options can be used as a marketing communications vehicle? Marketing Financial All directors directors respondents Yes 15 11 26 No 2 6 8 5. Do you think that the nancial and marketing departments should cooperate? Marketing Financial All directors directors respondents Yes 17 15 32 No 0 2 2

should cooperate, with just two out of 17 nancial directors disagreeing. Test of independence In order to test the four hypotheses the authors conducted a series of chi-squared tests. Yates correction for Continuity was applied32,33 Hypothesis No.1 The degree of knowledge of stock options by nancial and marketing directors is independent of their view on whether companies with listed options attract more investors. Chi-squared value 4.89, Asymptotic signicance 0.027 The authors reject the hypothesis, as the chi-squared value is signicant at the 5 per cent level. Not surprisingly, there appears to be a link between the degree of knowledge about stock options and the belief that stocks with listed options attract more investors. Hypothesis No.2 The degree of knowledge of stock options by the nancial and marketing directors is independent of their view on whether stock options could be used as marcom vehicles. Chi-squared value 6.08, Asymptotic signicance 0.014 The authors reject the hypothesis, as the chi-squared value is signicant at the 5 per cent level. For both kinds of directors, the authors have also found evidence of a link between the degree of knowledge about stock options and the belief that options can be used as marcom vehicles. Hypothesis No.3 Directors belief that the use of

Interpretation of the questionnaire results Based on the questionnaire results and without combining the questions with each other, the responses can be interpreted as follows. Financial directors seem to have a greater knowledge of stock options than marketing directors, which was a result that the authors expected. Additionally, both groups of interviewees believe that the use of communication media can actually increase the demand for a companys shares. It seems that both groups also believe that companies with listed options are more attractive to investors. A bigger proportion of marketing directors, however, think that stock options can be used as a marketing communication vehicle. Finally, there was almost a total acceptance that the marketing and nancial departments

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communication media can increase the demand for the companys shares is independent of the view about whether companies with listed options attract more investors. Chi-squared value 3.84, Asymptotic signicance 0.050 The authors reject the hypothesis, as the chi-squared value is just signicant at the 5 per cent level. The authors have found evidence of a link between the belief that communication media can increase the demand for shares and the belief that companies with listed options attract more investors. Hypothesis No.4 The belief that companies with listed options attract more investors is independent of the belief that stock options can be used as marcoms vehicles. Chi-squared value 14.84, Asymptotic signicance 0.00 The authors reject the hypothesis, as the chi-squared value is signicant at the 5 per cent level. The authors have evidence of a link between the belief that companies with listed options attract more investors and the view that options can be used as a marcoms vehicle. Based on the chi-squared tests the following conclusions can be drawn: 1 First, it seems that there is an interrelation between the degree of knowledge of stock options and the belief that they can be used as marcoms vehicles. 2 There is a relationship between the degree of knowledge of stock options and the belief that a stock with a listed option attracts more investors. 3 There is a relationship between the beliefs that the use of communication

media can increase the stocks demand and that stocks with listed options attract more investors. 4 Finally, both kinds of directors believe that options can be used as marcom vehicles as stocks with listed options attract more investors. CONCLUSION The recognition of this role of stock options by the nancial managers also matches the authors expectation. Their beliefs were much more important, as they do not belong to the marketing-related elds and functions of the organisation, but nevertheless identied the marketing dimension of stock options. Agreement between the marketing and nancial directors exemplies the need for much more intensive cooperation between these two elds. In conclusion, it can be stated that stock options are well known as an investment choice but their unique characteristics constitute an eective strategic marketing communications tool for business marketers. From the above, it is clear that marketers should include stock options in the planning of marcoms strategies and programmes. The promotional capacity for marketers to incorporate stock options as a communications vehicle can provide a competitive advantage for the underlying stock. They function as added value to achieve high credibility and high perceived quality for products and services in business markets. Additionally, any improvement in the organisations goodwill in business markets may help the company to achieve higher turnover and retain its customers and attract new ones. The use of stock options as a tool in a mix of media adds a powerful competitive advantage to the marketing message. The focus of any future research will test the importance of this statement.

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Trading costs and the relative rates of price discovery in stock, futures and option markets, Journal of Futures Markets, Vol. 15, pp. 353387. 30. Easly, D., OHara, M. and Srinivas, P.S. (1998) Options Volume and Stock Prices: Evidence on Where Informed Traders Trade, The Journal of Finance, Vol. 43, pp. 431465. 31. The ICAP directory is divided into industrial, commercial, services and miscellaneous organisations.

Note: For the statistical analysis of the questionnaire the authors used the Statistical Package for the Social Sciences that operate in a Windows environment (the S.P.S.S./P.C., ed. 9.0). 32. Wright, B.D. (1997) Understanding Statistics An Introduction for the Social Sciences, Sage Publications. 33. Siegel, S. and Castellan, N.J. Jr. (1988) Nonparametric Systems For the Behavioral Science, 2nd edn, McGraw Hill International Editions.

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