The Value of Celebrity Endorsements: a Stock Market Perspective

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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
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The fees in our sample range from fairly modest (£0.75 million paid by Avon to the Williams sisters or $3 million paid by Hershey Co. to Jessica and Ashlee Simpson), to very significant ($25 million paid by GM to
Tiger Woods or £30 million paid by Sony to Dale Earnhardt Jr.). Endorsement fees are not the only expense of the endorsement campaign. Other outlays (management expenses, TV ad costs, etc.) have to be considered as well. Our goal, however, is not to explicitly analyze endorsement fees and costs, but rather concentrate on the net present value of a celebrity endorsement, which accounts for all cash flows associated with it, and should be manifested in announcement-day stock returns.
information by market analysts and investors alike to evaluate the potential profitability of the contract, which will subsequently affect the future profits of a firm. They analyze 110 celebrity endorsement announcements by 35 firms involving 87 celebrities. On average, the impact of these announcements on stock returns is found to be marginally positive with +0.44 percent excess return on announcement-day. This suggests that celebrity endorsement contracts are generally being viewed as a worthwhile investment in advertising. However, cumulative abnormal returns are significant for the announcement date only; for all other event windows, ranging from (-1, 1) to (-10, 10), cumulative abnormal returns are mixed and not significantly different from zero.

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