The Value of Celebrity Endorsements: A Stock Market Perspective Haina Ding, Alexander Molchanov, Philip Stork1
Abstract Are celebrity endorsements worthwhile investments in advertising? To answer this question we analyze a unique sample of 101 announcements made between 1996 and 2008 by firms listed in the US. Internet is the main medium of communication for these announcements. We employ event study methodology and document statistically insignificant abnormal returns around the announcement dates. This finding is consistent with the notion that the incremental benefits from celebrity endorsements closely match the incremental costs due to such contracts. Further, we investigate if the announcement date return depends on a number of characteristics that are often used in the endorsement literature. As a result, we find that endorsements of technology industry products coincide with significant positive abnormal returns around the announcement dates. Finally, we find weak support for the match-up hypothesis between celebrities and endorsed products. Keywords: Event Study; Celebrity Endorsement; Match-Up; Internet; Marketing. JEL Classification: G14, M37
1 Address correspondence to Philip Stork, Massey University, College of Business, School of Economics and Finance, Private Bag 102 904, North Shore Mail Centre, Auckland, New Zealand, or email: firstname.lastname@example.org.
1 Introduction and Prior Work
The use of celebrities to endorse products and services has been a popular marketing strategy used by corporations for decades. Estimates suggest that as much as 25 percent of all television commercials (Erdogan et al. 2001) and 10 percent of advertiser’s budgets involve celebrity endorsements (Agrawal and Kamakura 1995). As many as 25 percent of American companies use celebrities in their advertising campaigns (Shimp 2000). In 2001, US companies paid $897 million to athletes, coaches, and sports personalities (Sports Business Journal 2002). In 2003, Nike spent $1.44 billion on celebrity endorsements (CNN Money 2003). Between two and three billion dollars were spent on celebrity advertising in 2006 in US alone (White et al. 2009). Such popularity of celebrity endorsements is hardly surprising. There is a bulk of anecdotal evidence linking the use of celebrities in advertising campaigns to improvement in operating performance. Estimates place Michael Jordan’s endorsement activities to be worth $10 billion in the course of his NBA career (Erdogan et al. 2001). PepsiCo’s management has attributed a two percent global market share increase to Spice Girls’ endorsement (Advertising Age International 1997).
Indeed, theoretical literature focusing on potential positive aspects of celebrity endorsements has been well developed. Among the main justifications for the use of celebrity endorsements are that celebrities make advertisement believable and enhance consumer recognition (Kamins et al. 1989; Friedman and Friedman 1979). Celebrities are believed to help in the recognition of brand names and to create both a positive attitude and a distinct personality for the endorsed brand (Petty et al. 1983; Kamins et al. 1989; McCracken 1989). It is generally believed that retailers have a better chance of communicating their message to consumers when celebrities are featured in advertising campaigns (Choi and Rifon 2007). Given the anecdotal and academic evidence of the potential beneficial effect of celebrity endorsements on sales and market shares, one might expect a positive impact of celebrity endorsement announcements on respective firms’ stock prices. After all, the stock price represents the discounted value of future cash flows, which supposedly increase following the involvement of a celebrity in the advertising campaign.2 A prominent paper investigating the issue in an event-study setting is Agrawal and Kamakura (1995). The authors assume that the announcement of a celebrity endorsement contract is used as 2 It is important to...
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