(Paper co-authored with Paola Cillo, Università Bocconi)

The marketing-finance literature has analyzed how investors react to marketing activities. The theory prescribes that marketing activities must perform four tasks in order to increase stock prices: 1) enhance; 2) accelerate; 3) stabilize the firm’s cash flows; and 4) increase its residual value. Using this framework, we investigate the effect on investor responses of four types of innovation: new products, new packaging, range extensions and new formulations. Contradicting the previous literature, we claim that no type of innovation is able to perform the four above-mentioned tasks simultaneously, but each type of innovation poses a trade-off. For instance, new products increase cash flow and firm residual value, but also decelerate cash flow and decrease its stability. On the contrary, new formulations increase  stability, butdo not increase cash flow or a firm’s residual value. The finance literature has shown that different groups of investors have different preferences about these four tasks. However, the marketing literature has ignored this heterogeneity in investors’ preferences and have considered them as a homogenous group that responds in the same manner to firm’s innovations. We fill in this gap, by investigating heterogeneity in investor responses to the same type of innovation. Relying on the finance literature, we classify investors along two dimensions: portfolio diversification (i.e., the percentage of shares that a company f contributes in investor's i portfolio) and their orientation (active vs. passive). Our dependent variable is the quarterly change in the amount of shares that investor i holds in company f. Our database comprises 27,409 investors which hold shares in 139 public companies operating in the food and drink industry from 2004-2009, for a total of 471,441 investor x quarter observations. Our findings support the existence of heterogeneity in investor responses to each type of innovation.