Asymmetric Roles of Advertising and Marketing Capability in Financial Returns to News: Turning Bad to Good and Good to Great

News reports that carry positive or negative sentiment about a firm influence the firm’s stock price performance. This study examines the role of firm controllable marketing factors, namely, advertising spending and marketing capability, in moderating the relationship between news stories and firm stock returns. Drawing on a large panel data sample of over 7000 firmmonth observations, the results indicate that the moderating roles of the two marketing factors are asymmetric and complementary: while advertising reinforces the positive impact of positive news on abnormal stock returns, marketing capability mitigates the negative impact of negative news. We explore the mechanisms via which these moderating effects occur and find that they operate through different stakeholders. Whereas the moderating effect of marketing capability is attributable to its influence on customers thus impacting the level and volatility of future cash flows, advertising moderates the effect of news through investors’ attention and response to the news. The econometric analysis accounts for the potential endogeneity between news reports, stock returns, and marketing variables. The results are also robust to alternative measures and analysis approaches.