Вы находитесь на странице: 1из 7

Joy Tang

joyt@mit.edu
14.33 short paper

Using Stock Return to Estimate the Response of Pepsi Challenge


Advertisement on Firm Value

This paper use stock return data as firm value data around Pepsi Challenge campaign
advertising series that consumers are asked to take a sip each from unlabeled glasses of
Coke and Pepsi during 1975 1976. (1) Time-series information of stock returns is used to
construct estimates of Pepsi Challenge effects on firm value of both Coke and Pepsi. The
behavior of the stock returns during the advertising campaign is normal compare with in
long run, and the campaign is not statistically significant effective. Coke and Pepsi appear
no substitutionary characteristics according to the stock return regressions.

Along with the rapid developing commercialism, many companies especially in food industry
are investing more and more on advertising to reach a bigger market, increase sales and firm value.
Coke and Pepsi, the two giants in soft drink industry have created many commercial success in the
history throughout American history. Some advertising campaigns are effective while some others are
not. A good advertising campaign will drive the growth of firm value, which can also be observed
through growth in stock return. Many investors are also trying to catch certain advertising event to
predict stock return growth, since the stock return are event driven. Thus, it is always interesting to
start from analyzing a historical company event's effect on its stock return with statistical tools to

generalize event driven behavior of stocks.

I. Data Sample and Selection

The purpose of the paper is to look at specifically the Pepsi Challenge advertising campaign's
potential impact on stock returns of Pepsi and also its biggest rival Coke. The advertising series started
in May.1975 ended around late 1976 across many states in US. Thus, I gathered the daily stock return
data from the beginning of 1974 to the end of 1979. I excluded the stick return data later than 1979,
because Pepsi and Coke have been constantly creating advertising series every now and then, and the
stock returns of dates later than 1979 contains many other event driven fluctuations which will interfere
the analysis on the specific Pepsi Challenge impact on stock returns. To avoid causations of general
stock market movement, I use the value weighted market return as the risk free return of stock market,
and most of the analysis are based on the abnormal stock return of Pepsi and Coke which equals to the
difference between Pepsi or Coke returns and the value weighted market return.

The challenge of the paper lies in the calculation of market share changes of Pepsi and Coke,
since I cannot find the market share data during this period. Also, there could be other events affecting
Pepsi or Coke's stock returns that are unobservable. It is also hard to conclude the Pepsi challenge
impact on Coke's firm value since Coke had also done responsive advertisement during that period to
maintain its market share. Thus in through the data, I observe the Pepsi challenge has positive impact
on Coke's stock return. Normally Pepsi and Coke are substitutionary brand, however since they are in
the same soft drink industry, it is also possible that any advertisement from one firm will uplift the
general popularity of similar products. One big assumption in this paper is that Pepsi and Coke haven't
change its Equity and Loan financial structure during this advertising period thus it is reasonable to use
stock returns as the growth of firm value.

I created a dummy variable that indicate the period that the advertisement is conducted. I use
1 to represent that the date of the stock return is opposed to the Pepsi Challenge Campaign, and 0
for not under the Pepsi Challenge impact. Thus the dummy variable is 1 for dates from May.1975 to
end of 1976, and 0 for dates from 1974 to April.1975 and 1976 to 1979.

II. Results

Through the statistics used in this paper, it shows the Pepsi Challenge campaign didn't create a
big positive impact on Pepsi's firm value, or relative returns of Pepsi's to Coke's firm Value. The
results are slightly inclined on that the Pepsi Challenge has potential positive impact on Pepsi's firm
value but it is not statistically significant. This result might be unpleasant for people who have strong
faith in advertising power, however it is reasonable. First of all, it is the low product differentiation
between the soft drink products of Pepsi and Coke. That raising the awareness of one brand can result
in increasing sales for both brands. Second, Pepsi and Coke are the two biggest soft drink companies
with similar sizes that almost dominated the market. The competition is intensified between Pepsi and
Coke, any public advertising from one side will arouse the competitive response from the other side in
a short time period. Thus neither Pepsi or Coke have absolute advantage is creating higher relative
return through advertising.

From Table 1, one can tell the mean of Pepsi's abnormal stock return during Pepsi Challenge is
almost the same as the mean during entire sample period, which means the Pepsi Challenge didn't add
statistically significant values to Pepsi. Similarly, although the mean of Coke's abnormal return is
about 15% lower during the Pepsi Challenge, the campaign didn't create a statistically significant

shock to Coke's firm value looking at the 95% confidence interval . This can be explained by Coke's
responsive advertising strategy, or the ineffectiveness of Pepsi Challenge advertisement. The mean of
the relative return between Pepsi and Coke is 15% higher during the Pepsi Challenge, however taking
into account of the 95% confident interval where the lower bound is significantly negative; it is still
risky to say Pepsi Challenge is helping Pepsi more than Coke during that advertising period.

Table 1
Average of daily data Entire sample period
1974 - 1979
(no. of obs: 1516)

During Pepsi Challenge


May.1975 1976
(no. of obs: 422)

Abnormal Return
Pepsi's abnormal
return

Mean
Std. Err.
[95% Conf. Intv]
Mean
Std. Err.
[95% Conf. Intv]
.000119 .000341 [-.0005494 .000788] .000119 .000509 [-.000881 .001119]

Coke's abnormal
return

Mean
Std. Err.
[95% Conf. Intv]
Mean
Std. Err.
[95% Conf. Intv]
-.000293 .000339 [-.0009575 .000372] -.000355 .000555 [-.001446 .000736]

Relative Return
Std. Err.
[95% Conf. Intv]
Mean
Std. Err. [95% Conf. Intv]
Pepsi's return Mean
.0004122
.000442
[-.000455
.0012796]
.0004737
.000657 [ -.000818 .001766]
minus Coke's
return
Note: Abnormal Return = Stock Return Value Weighted Market Return
Std. Err = Standard Error
95% Conf. Intv = 95% confidence Interval

Another approach is to look at the correlations results in Table 2. If Pepsi Challenge helped
Pepsi to gain extra profit, then the correlations between Pepsi's return and Market return should be
smaller during the Pepsi Challenge campaign period, since the Pepsi's return should be more affected
by the this advertising event other than following the general market movement. From Table 2, one can
tell the correlation of Pepsi's returns on market returns is around 5% lower (from 1.115 to 1.054),
however it is still unclear whether this 5% drop is significant according to the 95% confidence interval.

Similarly, the correlation of Coke's returns on market returns is about 2% higher which means Coke's
return is slightly more dependent on the market during Pepsi Challenge but not statistically significant.

Table 2
Correlations
Pepsi's return on
Market return
(Entire sample period)

R-squared = 0.3376
Adj R-squared = 0.3372
-----------------------------------------------------------------------------r_pep |
Coef. Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------vr | 1.115106 .0401423 27.78 0.000 1.036366 1.193846
_cons | .0000981 .0003402 0.29 0.773 -.0005691 .0007654
------------------------------------------------------------------------------

R-squared = 0.3569
Pepsi's return on
Adj R-squared = 0.3554
Market return
-----------------------------------------------------------------------------(During Pepsi Challenge)
r_pep |
Coef. Std. Err.
t
P>|t| [95% Conf. Interval]
-------------+---------------------------------------------------------------vr | 1.054439 .0690601 15.27 0.000 .9186926 1.190186
_cons | .0000892 .0005104 0.17 0.861 -.000914 .0010924
------------------------------------------------------------------------------

Coke's return on
Market Return
(Entire sample period)

R-squared = 0.4258
Adj R-squared = 0.4255
-----------------------------------------------------------------------------r_ko |
Coef.
Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------vr | 1.313112 .0391864 33.51 0.000 1.236247 1.389977
_cons | -.0003504 .0003321 -1.06 0.291 -.0010018 .0003009
------------------------------------------------------------------------------

R-squared = 0.4389
Coke's return on
Adj
R-squared = 0.4376
Market Return
-----------------------------------------------------------------------------(During Pepsi Challenge)
r_ko |
Coef. Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------vr | 1.334322 .0736157 18.13 0.000 1.189621 1.479023
_cons | -.0005362 .000544 -0.99 0.325 -.0016056 .0005332
------------------------------------------------------------------------------

Pepsi's abnormal return


on
Coke's abnormal return
(Entire sample period)

R-squared = 0.0236
Adj R-squared = 0.0229
-----------------------------------------------------------------------------r_ko1 |
Coef. Std. Err.
t P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------r_pep1 | .1525365 .0252399 6.04 0.000 .1030276 .2020453
_cons | -.0003111 .0003349 -0.93 0.353 -.0009681 .0003458
------------------------------------------------------------------------------

R-squared = 0.0569
Pepsi's abnormal return
Adj
R-squared = 0.054
on
-----------------------------------------------------------------------------Coke's abnormal return
r_ko1 |
Coef.
Std. Err.
t
P>|t| [95% Conf. Interval]
(During Pepsi Challenge) -------------+---------------------------------------------------------------r_pep1 | .2603548 .0516982 5.04 0.000 .1587354 .3619742
_cons | -.0003859 .0005397 -0.72 0.475 -.0014468 .000675
------------------------------------------------------------------------------

It is interesting to see Pepsi's and Coke's stock abnormal return has positive correlation
through the entire sample period, normally one would expect they have negative correlation since their
products are very similar and substitutionary. Moreover, the main concept of Pepsi Challenge
advertising series is to convince consumers that Pepsi-cola tastes better than Coke-cola. As contrary to
the advertising purpose, the correlation of Pepsi's and Coke's abnormal return is significantly higher
than the entire sample period. This could possibly explain by the fast responsive culture of advertising
competition between these two firms. When the two firms are not too aggressively focusing on
competing through advertisements, their returns are more likely to be affected by other random factors
from the market, internal firm operations changes, or financial structure adjustments.

As a conclusion, the similarity between Pepsi's and Coke's on products types and firm sizes,
also along with the intense competition on advertising decided that Pepsi Challenge advertisement was
not a very effective strategy for Pepsi to over perform Coke on market shares. Competition can be less
intensify if one of the company can innovate new products to create more product differentiation.

Reference:
1. Pepsi Extends Challenges to Coke. New York Times; Jul.13th.1976; pp66

Вам также может понравиться