strategy+business is published by PwC Strategy& LLC.
or, sign in with:
strategy and business
 / Spring 2010 / Issue 58(originally published by Booz & Company)


The Far-Reaching Effects of Deceptive Marketing

The cost incurred by a firm's marketing practices, once revealed by authorities, can extend far beyond the monetary amount of a fine.

Title: Regulatory Exposure of Deceptive Marketing and Its Impact on Firm Value (Subscription or fee required.)
Authors: Martha Myslinski Tipton (Singapore Management University), Sundar Bharadwaj (Emory University), and Diana C. Robertson (University of Pennsylvania)
Publisher: Journal of Marketing, vol. 73, no. 6
Date Published: November 2009 

In September 2009, Pfizer Inc. agreed to a US$2.3 billion settlement with the U.S. Department of Justice — the largest penalty ever imposed on an American company — after being charged with bribing doctors and illegally marketing the anti-inflammatory drug Bextra and three other medications. But the costs to the company could be far greater, according to the authors of this study. They find that drug companies cited by the Food and Drug Administration (FDA) for deceptive marketing experience significant declines in their financial value as shareholders lose confidence in the companies’ brands.

The pharmaceutical industry spends almost $30 billion on product marketing annually and is thus especially ripe for this study. To quantify the financial impact of FDA warnings, researchers examined stock market fluctuations in the days following the publication of 170 letters from the FDA to companies for inappropriate marketing practices. The researchers found that deceptive marketing — for example, a company’s use of unsubstantiated claims about a drug’s effectiveness or omission of published information about the risks of taking certain drugs — had a substantial effect on a firm’s market value, causing a drop of as much as 1 percent, or roughly $86 million for a firm of median size in the sample, in the two days after the FDA’s warning.

The researchers uncovered several mitigating factors in the way bad news affected firms. For one, FDA warnings over drug safety concerns — such as when Merck & Company failed to disclose health risks associated with its arthritis drug Vioxx — generally hurt a firm’s market value far more than unsubstantiated or false claims about a drug’s usefulness. Firms also suffered larger equity losses when the warnings they received were for dominant products in a market. The findings shed light on the true costs of risky marketing strategies, and give marketers something to consider as they look for ways to promote products to their target audience. 

Bottom Line: The cost incurred by a firm’s deceptive marketing practices, once revealed by authorities, can extend far beyond the monetary amount of a fine. Companies experience a significant drop in market value following such negative revelations.  

Author Profile:

  • Matt Palmquist was a founding staff writer and is currently a contributing editor at Miller-McCune magazine. Formerly, he was an award-winning feature writer for the San Francisco–based SF Weekly.
Follow Us 
Facebook Twitter LinkedIn Google Plus YouTube RSS strategy+business Digital and Mobile products App Store


Sign up to receive s+b newsletters and get a FREE Strategy eBook

You will initially receive up to two newsletters/week. You can unsubscribe from any newsletter by using the link found in each newsletter.