Quantifying the Long-Term Impact of Negative Word of Mouth on Cash Flows and Stock Prices
Year: 2008
Type: article
Abstract: This paper seeks to quantify the long-term financial impact of negative word of mouth (NWOM), an issue that has long challenged extant research. We do so with real-world data on firm security prices. The developed time-series models innovatively uncover (1) short- and long-term effects of NWOM on cash flows, stock returns, and stock volatilities, and (2) NWOM's “wear-in” effects (i.e., it takes a number of months before the stock price impact of NWOM reaches the peak point) and “wear-out” effects (i.e., it takes several months after the peak before the stock price impact of NWOM dies out completely). In addition, the results related to endogeneity and feedback effects from the stock market are also interesting, supporting the idea that historical underperformance in stock prices may breed more harmful future buzz in a “vicious” cycle of NWOM. After controlling for competition, NWOM's long-term financial harm becomes more destructive in magnitude, kicks in more quickly, and haunts investors longer. Overall, these findings offer some unique implications for buzz management, time-series models quantifying the financial impact of word of mouth, and the marketing-finance interface.
Source: Marketing Science
Author: Xueming Luo
Institutions: The University of Texas at Arlington, Temple University
Language: English
Subfield: Strategy and Management
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2137400580