Negative Celebrity Endorsement Publicity and Stock Returns: The Importance of Proactive Firm Reactions

Abstract

Nowadays, about one fourth of all prime time commercials in the United States feature celebrity endorsers. Previous research has identified numerous benefits of this powerful marketing strategy. Unfortunately, celebrities have been increasingly involved in negative publicity in the recent past. Using event study methodology, I examine the influence of negative celebrity endorser publicity on immediate and subsequent stock returns, covering 59 events during a 25 year period from 1988 to 2012. My research shows that firms do not have to take losses for granted. By choosing proactive versus reactive/passive strategies, firms can successfully counteract the subsequent negative stock returns. Thus, it is not the negative event itself that drives the subsequent financial performance, but rather the immediate response of firms. Although immediate firm reactions increase the salience of the event and cause stock prices to drop initially, they also build up investors' trust and confidence again, ultimately leading to increased stock returns in the subsequent weeks. On the flipside, a reactive/passive strategy shows a lack of control and leadership, which can lead to substantial financial losses in the subsequent weeks. I show that this main effect is attenuated for subsidiary (vs. corporate) brands. Further, the appropriateness of the reaction (match between expected and actual firm reaction) is also crucial. Overall, this dissertation helps to advance the knowledge regarding the financial risk of negative celebrity endorser publicity and provides firms with advice to best manage the situation.