The Economic Worth of Celebrity Endorsers: An Event Study Analysis
Author(s): Jagdish Agrawal and Wagner A. Kamakura
Source: Journal of Marketing, Vol. 59, No. 3 (Jul., 1995), pp. 56-62 Published by: American Marketing Association Stable URL: http://www.jstor.org/stable/1252119 . Accessed: 14/09/2014 06:39 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp . JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. . American Marketing Association is collaborating with JSTOR to digitize, preserve and extend access to Journal of Marketing. http://www.jstor.org This content downloaded from 111.68.103.164 on Sun, 14 Sep 2014 06:39:43 AM All use subject to JSTOR Terms and Conditions Jagdish Agrawal & Wagner A. Kamakura T he Economic Worth of Celebrity Endorsers: An Ev ent S tudy Analysis Celebrity endorsement has become a prev alent f orm of adv ertising ;n the United S tates. Despite extensiv e litera- ture on the ef f ects of celebrity endorsements on consumers' brand attitudes and purchase intentions, little is known about the economic v alue of these endorsements. Research on this topic has typically f ocused on theories ex- plaining how celebrity endorsements inf luence consumers' attitudes and intentions. T he authors assess the impact of celebrity endorsement contracts on the expected prof itability of a f irm by using ev ent study methodology. T heir approach assumes that the announcement of a celebrity endorsement contract, usually widely publicized in the business press, is used as inf ormation by market analysts to ev aluate the potential prof itability of endorsement ex- penditures, thereby af f ecting the f irm's expected return. Announcements of 110 celebrity endorsement contracts were analyzed. Results indicate that, on av erage, the impact of these announcements on stock returns is positiv e and suggest that celebrity endorsement contracts are generally v iewed as a worthwhile inv estment in adv ertising. C elebrity endorsement has become a prev alent f orm of adv ertising in the United S tates. According to indus- try sources, approximately 20% of all telev ision com- mercials f eature a f amous person, and approximately 10% of the dollars spent on telev ision adv ertising are used in celebrity endorsement adv ertisements (Adv ertising Age 1987; S herman 1985). T he number and dollar v alue of celebrity endorsement contracts are increasing, and these contracts constitute a signif icant and growing portion of ad- v ertising budgets (McGill 1989). S ev eral studies hav e examined consumers' response to celebrity endorsements in adv ertising. Findings show that celebrities make adv ertisements believ able (Kamins et al. 1989) and enhance message recall (Friedman and Friedman 1979). Furthermore, celebrities aid in the recognition of brand names (Petty, Cacioppo, and S chumann 1983), create a positiv e attitude towards the brand (Kamins et al. 1989), and create a distinct personality f or the endorsed brand (Mc- Cracken 1989). Ultimately, celebrity endorsements are be- liev ed to generate a greater likelihood of customers' choos- ing the endorsed brand (Heath, McCarthy, and Mothers- baugh 1994; Kahle and Homer 1985; Kamins et al. 1989; Ohnian 1991). T hus, the use of celebrity endorsements is an adv ertising strategy that should enhance the marginal v alue of adv ertisement expenditures and create brand equity by means of the "secondary association" of a celebrity with a brand (Keller 1993). Celebrity endorsements are expensiv e f or the f irm. De- pending on the status of the celebrity, remuneration could Jagdish Agrawal is an assistant prof essor, S chool of Business and Eco- nomics, Calif ornia S tate Univ ersity, Hayward. Wagner A. Kamakura is an associate prof essor, Katz Graduate S chool of Business, Univ ersity of Pittsburgh. T he authors are gratef ul to three anonymous rev iewers f or their helpf ul comments and to Zaf ar Iqbal f or his able assistance on this research. run into millions of dollars f or sev eral years. A contract may also include a prof it sharing plan. Firms of ten build special and costly adv ertising campaigns around celebrities. For ex- ample, Coca Cola Co. reportedly spent $25 million in an ad- v ertising campaign with Bill Cosby as its spokesperson f or Coke (Adv ertising Age 1986). S imilarly, IBM spent $40 mil- lion in an adv ertising campaign inv olv ing MAS H actors (Reuters 1987). Ov erall, the use of celebrities as spokesper- sons in adv ertisements constitutes a signif icant inv estment in intangible assets by the sponsoring f irm-an inv estment that management hopes to of f set with greater f uture sales rev enues and prof its. T he economic v alue of strategic marketing decisions is receiv ing growing interest in marketing literature. A number of studies hav e examined the ef f ect of strategic marketing decisions such as product innov ation, research and dev elop- ment expenditures, adv ertisement expenditures, product quality, and consumer satisf action on f irm prof itability (Capon, Farley, and Hoenig 1990; S zymanski, Bharadwaj, and Varadarajan 1993). Because a growing number of f irms are inv esting in celebrity endorsement to enhance the v alue of adv ertising dollars and build brand equity, a natural ques- tion is: What are the economic returns f rom the inv estment in this f orm of adv ertising? Our purpose is to assess the prof itability of the celebrity endorsement adv ertising strategy. Prev ious studies on the impact of celebrity endorsements hav e prov ided v aluable in- sights into consumers' responses to adv ertisements that por- tray celebrities. Our premise is that it is important f or a man- ager to know whether a celebrity endorsement strategy gen- erates a f av orable consumer response, as well as understand whether the economic returns justif y the costs associated with such a strategy. Measuring the ov erall ef f ect of adv ertising expenditures on sales is problematic, and a direct assessment of the ef - f ectiv eness of a celebrity endorsement on a f irm's prof itabil- ity may be impossible. In addition, because adv ertising ef - Journal of Marketing Vol. 59 (July 1995), 56-62 56 / Journal of Marketing, July 1995 This content downloaded from 111.68.103.164 on Sun, 14 Sep 2014 06:39:43 AM All use subject to JSTOR Terms and Conditions f ects accrue ov er time, current prof its may not accurately re- f lect the true prof itability of a giv en campaign. T he dif f icul- ty associated with isolating and measuring the prof it associ- ated with a giv en celebrity endorsement campaign led us to use an alternativ e measure. T his is the expected prof it asso- ciated with a celebrity endorsement campaign as ref lected in the abnormal returns of a f irm. Abnormal returns are mea- sured using ev ent study methodology. Although a f irm's prof it is inf luenced by sev eral f actors, and isolating the con- tribution of any one v ariable is dif f icult, the ev ent study methodology prov ides a means and unique opportunity to assess the impact of a particular strategy on a f irm's expect- ed f uture prof its. Ev ent S tudy Methodology Ev ent study methodology measures the magnitude of the ef - f ect that an unanticipated ev ent has on the expected prof - itability and risk of a portf olio of f irms associated with that ev ent. T he theory underlying ev ent study methodology is the ef f icient market hypothesis (Fama et al. 1969). According to this theory, the price of a security is the present v alue of f u- ture cash f lows expected f rom a f irm's assets and, at any giv en time, ref lects all the av ailable inf ormation about the f irm's current and f uture prof it potential. If any new inf or- mation resulting f rom an unexpected ev ent is believ ed to af - f ect a f irm's current and f uture earnings, the security price changes as soon as the market learns of the ev ent. T heref ore, stock prices are v iewed as reliable indicators of a f irm's v alue. T he amount of change in the price of a security af ter an ev ent, relativ e to its pre-ev ent price, would ref lect the market's unbiased estimate of the economic v alue of that ev ent (Brown and Warner 1985). T o examine whether an ev ent had any impact on the f irm's v alue, abnormal return, which is the change in stock price af ter it has been adjusted f or changes resulting f rom general market mov ements, is measured. T his methodology is well accepted and has been widely used in a v ariety of disciplines, such as f inance, accounting, law, organizational behav ior, and business strategy. More re- cently, the methodology has also been applied to assess the impact of some marketing-related ev ents on a f irm's prof - itability; such ev ents include, f or example, a change in a company's name (Horsky and S wyngedouw 1987), new product introduction (Chaney, DeVinney, and Winer 1991), brand lev eraging (Lane and Jacobson 1995), product recalls (Jarrell and Peltzman 1985), and regulations and rulings on f alse adv ertising (Peltzman 1981). Details of ev ent study methodology are widely av ailable in the literature (Horsky and S wyngedouw 1987; S chwert 1981). We also present a summary of this methodology in the Appendix. Our rationale f or applying ev ent study methodology to celebrity endorsements is: Although it may be impossible to measure the direct impact of a celebrity endorsement on a f irm's f uture prof its, we can inv estigate whether the decision to incur this adv ertising expenditure is v iewed as wise by in- v estors. Because of the substantial costs usually associated with celebrity endorsements, we argue that a f irm's contrac- tual agreement with a celebrity is a major ev ent with poten- tial f inancial implications. S uch contracts are f ormally an- nounced by f irms and usually receiv e wide cov erage in the media. T heref ore, when an announcement is made about a celebrity endorsement contract, inv estors make independent judgments on the f uture prof it impact of the contract. T hese judgments are then immediately ref lected in the f irm's stock returns. T heref ore, measuring the abnormal returns of f irms announcing endorsement contracts enables us to examine the market's v aluation of the net economic worth of celebri- ty endorsements. Results Data We def ine the ev ent day as the date when the announcement of a contract or a f orthcoming contract between a f irm and a celebrity f irst appeared in the print media. We consulted major newspapers f or announcements of contracts between January 1980 and December 1992. We also conducted a thorough search of other newspaper and newswire serv ices in Lexis/Nexis data f iles to search f or any leakage of f orth- coming contracts, and other f irm-specif ic ev ents f rom f iv e days bef ore to one day af ter the announcements of the con- tracts. Our search led to the identif ication of 207 cases of en- dorsements f or which announcement dates were av ailable. Ninety-sev en cases were excluded f rom the analysis because they inv olv ed priv ately held companies or f oreign f irms f or which stock data were unav ailable. Hence, our f inal sample size was 110 observ ations. For most of the cases (83%), the ev ent day is the date when the news about an actual contract appeared in the print media. We f ound no other prior news of a f orthcoming contract f or these cases. For the remaining cases, there was prior inf ormation f rom the print media of f orthcoming contracts; and f or these, the ev ent day is the f irst day when the news of the f orthcoming contract became public through print media. T he sample of 110 cases repre- sents announcements of celebrity endorsement by 35 f irms inv olv ing 87 celebrities. Each announcement contained pri- marily inf ormation regarding the names of celebrities and the sponsoring f irm. Only a f raction of the announcements (31%) also contained inf ormation on the contract v alue, and eight cases were associated with the endorsement of new brands. Data on stock returns were collected f rom the f iles of the Center f or Research in S ecurity Prices at the Univ er- sity of Chicago. Abnormal Returns Due to Announcement of Celebrity Contracts Following Brown and Warer's (1985) study, we estimated the parameters of the market model (Equation 3 in the Ap- pendixl) f or each f irm by regressing its actual returns on the returns of a weighted portf olio of securities using an esti- mation period of 239 days (t - 244 to t - 6 days relativ e to the ev ent day, t = 0). T he estimated market model parame- ters (a and B3) were then used in Equation 4 to estimate ab- normal returns to the portf olio of 35 f irms f or 110 an- nouncements on and around the ev ent day. Figures 1 and 2 1All equations mentioned subsequently can be f ound in the Ap- pendix. Celebrity Endorsers/ 57 This content downloaded from 111.68.103.164 on Sun, 14 Sep 2014 06:39:43 AM All use subject to JSTOR Terms and Conditions FIGURE1 Frequency Distribution Abnormal Returns 92 20 ------------------------------------ -- -- -- u. l) 4 15 -------------- ------------------ 0 m z 5-- --------------------- o , I .A? . .. ll. .. l.. .1 -3.75 -3.25 -2.75 -2.25 -1.75 -1.25 -.75 -.25 .25 .75 1.25 1.75 2.25 ABNORMAL RET URN 2.75 3.25 3.75 4.25 4.75 5.25 5.75 6.25 FIGURE2 Frequency Distribution S tandard Abnormal Returns - mol- ii i i i i i i i i i i i ii i i i i i i i i i i i . .* :::: ::::::::::::::::::1:1 -3.60 -3.20 -2.80 -2.40 -2.00 -1.60 -1.20 -.80 -.40 0.00 .40 .80 1.20 1.60 2.00 2.40 2.80 S T ANDARDIZED ABNORMAL RET URN present the distribution of abnormal returns (Equation 4) and standardized abnormal returns (Equation 5), respectiv e- ly on the ev ent day f or all 110 ev ents. T able 1 presents the av erage abnormal returns f or the 110 announcements on the ev ent day, as well as f or a win- dow of ? 10 days around the ev ent day. Results show that, on av erage, announcements of celebrity endorsement con- tracts are associated with positiv e excess returns. T he av er- age abnormal return f or the ev ent day is .44%, which is sta- tistically signif icant (t = 2.39, p < .05).2 T his percentage rep- resents the largest gain in excess returns ov er a period of 2We used the Center f or Research in S ecurity Prices market v alue weighted portf olio of all NYS Eand AMEX stocks toserv e as the proxy f or the market portf olio when estimating each f irm's market model. S imilar results tothose we report here were ob- tained when the equally weighted market portf olio was used. T he results at the ev ent day were: Av erage abnormal return = .53%; T - testl = 2.74; and T -test2 = 2.92. 58 / Journal of Marketing, July 1995 30 25 - co m 20- 4 0 U. O 15- 1J z 10 - 5 0 . - - - - - - - - . ::-- 1::1::: --~-------------- , . . . ~~~~. . I I This content downloaded from 111.68.103.164 on Sun, 14 Sep 2014 06:39:43 AM All use subject to JSTOR Terms and Conditions T ABLE1 Excess Returns of 110 Announcements of Celebrity Endorsements Av erage Cumulativ e %of + Ev ent Abnormal Av erage Abnormal Abnormal Day Return (%) T -S tatisticl T -S tatistic2 Return (%) Returns -10 .26 1.28 .93 .26 49.1 -9 .30 1.61 1.98* .56 58.2 -8 -.28 -1.11 -1.01 .28 44.5 -7 -.11 -.36 -1.51 .17 38.2 -6 .02 .55 .11 .19 44.5 -5 -.21 -.84 -.32 -.02 47.3 -4 .15 1.32 .81 .13 54.5 -3 -.00 -.74 -1.07 .13 38.2 -2 -.05 -.23 -.31 .08 44.5 -1 .09 .54 1.42 .17 56.4 0 .44 2.39* 2.63* * .61 57.3* +1 -.21 -.96 -.55 .40 45.5 +2 -.26 -1.51 -1.69 .14 41.8 +3 -.02 .30 .47 .12 50.0 +4 .04 .33 -.01 .16 45.5 +5 .20 .89 .04 .36 52.7 +6 .19 .97 .18 .55 53.6 +7 -.32 -1.47 -1.70 .23 34.5 +8 -.17 -.87 -.37 .06 55.5 +9 -.02 .00 -.09 .04 46.4 +10 .18 .74 -.12 .22 43.6 T -S tatisticl = Based on the parametric test in Equation 6. T -S tatistic2 = Based on Corrado's (1989) nonparametric test. * * p <= .01. * p < =.05. ? 10 days around the ev ent day. T he results indicate that, on av erage, f irms announcing contracts with celebrities experi- enced a gain of .44% in excess returns.3 T his estimate has the same order of magnitude as abnormal returns reported in other marketing-related ev ent studies. For example, Horsky and S wyngedouw (1985) report .64% positiv e excess re- turns on av erage in response tothe changes in a f irm's name; Chaney, DeVinney, and Winer (1991) report .25% abnormal return with the announcement of new products; and more re- cently, Lane and Jacobson (1995) report a .32% abnormal return due tothe announcement of brand lev eraging. We perf ormed an additional test to f urther examine the signif icance of our results. T he distribution of excess returns on the ev ent day, presented in Figures 1 and 2, depict a dis- tribution that is skewed slightly to the right. T his skewed distribution suggests that the assumption of a normal distri- bution implicit in the t-test in Equation 7 might be v iolated. T ocircumv ent this problem, Corrado (1989) has suggested an alternativ e nonparametric rank test. T his test uses only ordinal inf ormation about the returns on the ev ent day, rather than inf ormation on the magnitude of returns (Corrado 1989). As a result, the test statistic is not inf luenced by the 3For nine cases, there was leakage of news regarding "negotia- tions". Because such negotiations hav e f ailed in the past on some occasions (f or example, Madonna f or LA Gear and Meryl S treep f or American Express), we ignored such rumors. Howev er, consid- ering the date of publication of rumors as the ev ent day produced v ery similar results. Results f or the ev ent day were: Av erage ab- normal return = .38, T -testl = 2.33, and T -test2 = 2.42; and CAR (Cumulativ e Av erage Return) f or -1 to0 days was .41, T -testl = 1.86. v ariance in the distribution of returns on the ev ent day. As indicated in Column 4 of T able 1, the t-v alue of the ev ent day estimates deriv ed f rom this test is 2.63, which is statis- tically signif icant. T his result f urther conf irms the signif i- cance of excess returns on the ev ent day4. T he last column presents the percentage of the 110 abnormal returns, which are strictly positiv e f or each day, showing that 57.3% of all cases had a positiv e abnormal return on the ev ent day. T his proportion was signif icantly (at p < .05) larger than the av - erage percentage of positiv e returns observ ed ov er the esti- mation period (47.0%). Cumulativ e Abnormal Returns It is standard practice in an ev ent study to examine the cu- mulativ e excess returns f or v arious windows surrounding the ev ent day f or tworeasons. First, analyzing abnormal re- turns surrounding the ev ent day allows f or uncertainty re- garding the actual date of the ev ent. S econd, it allows the re- searcher to capture the cumulativ e ef f ect of an ev ent, be- cause the ef f ect may be spread ov er sev eral days surround- ing the ev ent day because of the gradual av ailability of in- f ormation and interpretation of the ev ent's impact on f uture f irm prof itability. T able 2 presents the cumulativ e av erage returns (CAR) f or v arious windows surrounding the ev ent day. Of all win- dows considered, only the one f rom -1 to0 days showed a signif icant CAR, with a v alue of .54%. T he signif icance of 4Figures 1 and 2 show some of the abnormal returns as potential outliers. We replicated our analyses af ter excluding outliers and ar- riv ed at essentially the same conclusions reported in the text. Celebrity Endorsers/ 59 This content downloaded from 111.68.103.164 on Sun, 14 Sep 2014 06:39:43 AM All use subject to JSTOR Terms and Conditions T ABLE2 Cumulativ e Abnormal Returns f or Windows S urrounding the Ev ent Day Cumulativ e Av erage T ime Abnormal Interv al Return (%) T -statistic -10; +10 .23 .61 -10; -2 .08 .49 -5; +5 .18 .44 -5; -2-.1 -. -24 -2; 0 .48 1.54 -1; 0 .54 2.04* 0; +1 .24 .99 -1; +1 .33 1.12 +1; +5 -.24 -.42 +1; +10 -.39 -.50 -1; +10 .15 .38 * S tatistically signif icant at the .05 lev el. We computed the T -statistics using Brown and Warner's (1985) Equation A.6. CAR f rom -1 to 0 days is plausible because, f or some ev ents, there is a lag of at least one day between the an- nouncement of a contract and av ailability of inf ormation through print media. As a result, the positiv e abnormal re- turn on Day -1 may ref lect the impact of those announce- ments that were made on Day -1, but were not printed by the media until Day 0. In summary, ev idence of signif icant pos- itiv e returns on the ev ent day and the cumulativ e av erage re- turn ov er two days (including the ev ent day) suggest that, on av erage, the market quickly reacts positiv ely to announce- ments of celebrity endorsement contracts in adv ertising. T he absence of signif icant cumulativ e ef f ects beyond the 2-day period around the ev ent is consistent with the ef f icient mar- ket assumption implicit in ev ent study methodology (Fama et al. 1969). T o test whether our results were caused by hav ing a sub- stantial subsample associated with sof t drinks (37.3%) and athletic shoes (22.7%), and using a substantial proportion of sports celebrities (55.5%), we perf ormed a regression analy- sis. We regressed the standardized abnormal returns on the ev ent day on a set of dummy v ariables, identif ying the an- nouncements associated with sof t drinks (S of t-dummy) or athletic shoes (S hoe-dummy), and sports celebrity endorsers (S port-dummy). None of the v ariables had any signif icant impact on abnormal returns (F3,105 = 1.57; p < .20). Our re- sults suggest that ev ent study results are not inf luenced by the inclusion of a large portion of cases f rom the sof t drink or athletic shoe industries. Nor was ev idence f ound that the market assigns sports celebrities more or less v alue than it does non-sports celebrities. Conclusions and Extensions Our analyses indicate that the market reacted both positiv e- ly and negativ ely to the announcement of dif f erent celebrity endorsement contracts, which is ref lected in both positiv e and negativ e abnormal returns on the ev ent day. Howev er, on av erage, inv estors seem to v alue positiv ely the use of celebrities in adv ertisements. A signif icant percentage of positiv e abnormal returns to the sponsoring f irms was ob- serv ed on the ev ent day; on av erage, the sponsoring f irms recorded a gain of .44% excess returns in their market v alue as a result of announcing contracts with celebrity endorsers. Looking at sev eral "windows" around the ev ent day, we f ound that the interv al between one day bef ore the ev ent and the ev ent day was the only period with signif icant cumula- tiv e abnormal returns. Ov erall, these results clearly indicate a positiv e impact of celebrity endorsements on expected f u- ture prof its, which lends objectiv e, market lev el support to the use of celebrity endorsers in adv ertising. Recent reports in the business press suggest that there are decreasing returns associated with using celebrities in adv ertising. For example, the costs associated with celebrity endorsements are rising; some celebrities endorse sev eral products, sometimes ev en switching their endorsements to riv al brands; the negativ e publicity generated by some celebrities has added the potential risk of negativ e impact; and surv eys of consumers' reactions to product endorse- ments rev eal that only a f raction of consumers react posi- tiv ely to endorsements. Howev er, the widespread and per- sistent use of celebrities in adv ertising suggests that market- ing managers continue to believ e that celebrity endorse- ments are a worthwhile component of the adv ertising strate- gy, despite the costs inv olv ed. Our results suggest that this belief is generally shared by inv estors as well. T he positiv e av erage abnormal returns f ound in this study ref lect the mar- ket's general belief that the expected incremental gain f rom celebrity endorsements exceeds the incremental costs of ad- v ertising due to such contracts. Because stockholders are one of the major stakeholders in the f irm, shareholder v alue analysis has been adv ocated and practiced (Arzac 1986; Day and Fahey 1990; Rappaport 1986) as a means of assessing the f inancial consequences of strategic decisions. Recent studies show a positiv e associa- tion between abnormal returns and inv estments in intangible assets, such as innov ativ eness (Chaney, Dev inney, and Winer 1991) and brand quality (Aaker and Robertson 1994). Our results prov ide additional empirical ev idence that in- v estors not only pay close attention to marketing strategies but also react to them. Our results also prov ide f urther sup- port f or the need f or shareholder v alue analysis in conjunc- tion with analysis of marketing strategies. Our results also may of f er some insights to f irms con- sidering the use of celebrity endorsers. T o date, managers considering the hiring of celebrity endorsers f or adv ertising could only turn to results of consumer experiments and sur- v eys f or guidance. Our results, based on a large sample of celebrity endorsement contracts, prov ide new ev idence that celebrity endorsements are generally v iewed as a prof itable adv ertising strategy. Howev er, measurement of abnormal re- turs is only the f irst step in assessing the economic v alue of celebrity endorsement. A manager, when considering the use of celebrity endorsements, must identif y the appropriate celebrities who will potentially enhance the v alue of inv est- ing in adv ertising. Prev ious studies on the ef f ectiv eness of celebrity endorsements prov ide v aluable insights regarding the celebrity characteristics that consumers v iew positiv ely. Further research could surv ey inv estments analysts regard- 60 / Journal of Marketing, July 1995 This content downloaded from 111.68.103.164 on Sun, 14 Sep 2014 06:39:43 AM All use subject to JSTOR Terms and Conditions ing the characteristics of celebrities and circumstances when celebrity endorsements are v iewed either more positiv ely or negativ ely. Results of such surv eys may prov ide additional inf ormation f or the selection of appropriate celebrities. Celebrity endorsement contracts are not only on the rise but the av erage compensation paid to celebrities is also in- creasing. Reports f rom the annual surv eys of Forbes (Lane 1994) magazine rev eal that many celebrities earn f ar more money f rom their endorsement contracts than f rom their usual f ields of endeav or. In addition, the abnormal returns reported here actually suggest that, on av erage, celebrities are worth more than the costs of hiring them. T hese results should be of interest to agencies that represent celebrities in contract negotiation. T he results of our study, as well as other recent market- ing-related ev ent studies, should prov ide impetus f or apply- ing this methodology to other areas. Managers of ten prean- nounce their marketing decisions through interv iews or press releases. T heir decisions may be associated with, f or example, the introduction of new products, a change in ad- v ertising agencies, or the dev elopment of new segments or markets. Apart f rom competitors, consumers, and distribu- tors, these announcements also prov ide inf ormation to in- v estors regarding the f irm's commitment and intentions (El- ishberg and Robertson 1988; Horsky and S wyngedouw 1987). Inv estors' reactions to such announcements, ref lected in positiv e or negativ e abnormal returns, serv e as f eedback to managers regarding the inv estors' assessments of their decisions (Rappaport 1987). On the basis of interv iews with top executiv es, Webster (1981) identif ies the lack of under- standing about the f inancial implications of marketing deci- sions as one of the major issues f acing marketing manage- ment. Ours and other ev ent studies show that ev ent study methodology prov ides unique opportunities f or marketing managers to assess the ramif ications of their decision on the f irm's prof itability. Finally, a cav eat must be placed on this and other stud- ies that hav e employed ev ent study methodology. We hav e attributed the excess return obtained at the date of the con- tract announcement to inv estors' expectations regarding the f uture prof itability of the celebrity's endorsement. T he im- plicit assumption here is that inv estors make inf erences about the net present v alue of the f irm's inv estment in the celebrity contract and that the outcome of this inf erence by inv estors will be ref lected in the f irm's stock price. In other words, we assume that the announcement of an endorsement contract is interpreted directly as inf ormation about the f irm's f uture use of the celebrity in adv ertising. T his as- sumption is based on the f indings of prev ious studies that demonstrate the potential ef f ect of celebrity endorsement on consumer attitudes and intentions. T he announcement of such contracts could also send other signals to f inancial markets that might not be directly related to the usef ulness of the celebrity in adv ertising (Klein and Lef f ler 1981; Nelson 1974). For example, the an- nouncement of a contract could act as a signal to inv estors of the conf idence a f irm has in the superiority of its products or of its commitment to particular brands. In contrast, we as- sume that inv estors use these announcements as inf orma- tion: T hey consider the costs and potential benef its of the celebrity endorsement and react to the announcement ac- cordingly. Obv iously, as in any ev ent study, v erif ying whether the observ ed abnormal returns attributed to each an- nouncement are due to inv estors' v aluation of the celebrity endorsements or their response to some unrelated signal is v irtually impossible, because it would require identif ication of all the hidden signals implied by each ev ent. Howev er, at the aggregate lev el, whether f irms use announcements of celebrity endorsements to signal other intentions (e.g., en- tering a new market segment, increasing adv ertisement ex- penditures) or whether the market interprets those an- nouncements as hidden signals can be assessed by surv eys of managers and inv estment analysts. T hus, Eliashberg and Robertson's (1988) study on inf ormational and signalling v alues of new product preannouncements could prov ide a basis f or f urther research in this area. Appendix A S ummary of the Ev ent S tudy Methodology T he price of a capital asset i at time t (Pit) is the present v alue of the f uture expected cash f lows f rom the asset (1) Pit= Zk = 1,dit + k/(l + rit+ k)k where dit + k is the expected cash f low f rom asset i in period t + k, and ri + k is the discount rate of the cash f lows ac- counting f or its estimated riskiness. T he impact of an ev ent on the f irm's potential prof itabil- ity can be measured by comparing the stock return at the ev ent day: (2) Rit = (Pit + dit - Pit- )/Pit- 1, to the "normal return" that would be expected if the ev ent did not take place. T his "abnormal" return measures the change in the stock v alue due to an ev ent. Among v arious models, the one used most of ten f or es- timating expected or "normal" returns is the market model (Fama 1970). According to the market model, the normal re- turn to asset i at time t can be expressed as a linear f unction of the returns f rom a portf olio of all marketed assets Rmt, (3) Rit = aoi + iRMt + eit. T he abnormal return eit f or a security i at the date t of an ev ent can, thus, be obtained as (4) eit = Rit - ,oi - iRmt. T he commonly accepted hypothesis of ef f icient markets implies that the dev iation eit is a random v ariable with mean equal to 0, because the dev iations between the actual returns to asset i and their expected v alues, conditional on all av ail- able inf ormation at time t - 1, should not be systematically dif f erent f rom 0. T o test if abnormal returns resulted because of an ev ent, test the hypothesis that the cross-sectional mean of eit at the ev ent day is dif f erent f rom 0. T he hypothesis is tested as f ollows. Estimate the coef f icients oi and 3i f rom Equation 3 through a linear regression ov er an estimation period of T days (f or example, -244 to -6 days relativ e to ev ent day = 0) Celebrity Endorsers / 61 This content downloaded from 111.68.103.164 on Sun, 14 Sep 2014 06:39:43 AM All use subject to JSTOR Terms and Conditions f or each f irm i announcing a celebrity endorsement contract. T he standardized abnormal return f or the ev ent day t = 0 is (5) 6i0 = eio/S i, where S i is the standard dev iation of the regression residuals that were obtained prior tothe contract announcement. 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