We discover that a startup’s ability to combine costly signals (tangible achievements like financial capital, intellectual property, and team credentials) with costless signals (verbal cues like passion and concreteness) can significantly influence funding outcomes. However, the effectiveness of these signals isn’t straightforward—more isn’t always better.

Costly Signals: The Power of Tangible Achievements

Costly signals—substantial markers of a startup’s credibility—include:

• Financial Capital: Investments already made in the business.
• Human Capital: The founders’ education and experience.
• Social Capital: Business and institutional connections.
• Intellectual Capital: Patents and intellectual property.

These signals create confidence among investors by showcasing real progress and potential. However, our study found an “inverted U-shape” effect: while a moderate level of costly signals increases funding likelihood, excessive emphasis on these achievements can deter investors. Why? Too many costly signals might suggest overvaluation, leaving little room for investors to add value or signaling rigidity in the startup’s approach.

Costless Signals: The Subtle Art of Communication

Costless signals—intangible, verbal elements—also play a critical role in pitches:

• Passion: Expressing enthusiasm and emotional intensity.
• Concreteness: Using specific, detailed language.

While passion can enhance investor perception when paired with strong costly signals, it can backfire if used excessively, particularly by startups lacking substantial achievements. In such cases, passion might appear as “cheap talk,” undermining credibility.

Concreteness, on the other hand, provides clarity and specificity, which are crucial for startups with fewer tangible assets. However, overly concrete communication from startups with strong credentials can seem rigid, signaling a lack of strategic flexibility or long-term vision.

Key Insights for Startups

Our findings reveal that costly and costless signals don’t operate in isolation but interact in complex ways:

• Startups with fewer costly signals should focus on moderate concreteness to provide clear, detailed information about goals and achievements. Passion should be used sparingly to avoid seeming compensatory.
• Startups with strong costly signals should confidently showcase passion because it signals commitment and enthusiasm. However, they should avoid being overly concrete, which might make their approach seem inflexible or uninspired.

Lessons for Investors

For investors, decoding these signals is critical to identifying high-potential ventures:

• Look beyond flashy pitches that rely heavily on passion without backing it up with tangible credentials.
• Recognize that concreteness can enhance trust in startups with fewer achievements but may indicate a lack of strategic foresight when combined with strong costly signals.

Practical Applications for Stakeholders

This research underscores the importance of balance in business-to-investor (B2I) marketing. Startups must carefully craft their pitches, combining tangible achievements with just the right level of enthusiasm and detail. Policymakers and VC firms can also leverage these findings to design tools and frameworks that help entrepreneurs refine their pitches, ensuring a healthier startup ecosystem.

The art of the pitch lies in balance. Startups that combine credibility with clarity while avoiding overcompensation are better positioned to win investor trust. Similarly, investors who assess both tangible and intangible signals holistically can uncover promising ventures.

Source: Greg Nyilasy, Shangwen Yi, Stephen Ludwig, and Darren W. Dahl, “,” Journal of Marketing.

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A 2021 survey of 500 global executives, jointly conducted by McKinsey and Focusing Capital on the Long Term, found that top managements continually feel pressured to meet near-term earnings targets at the expense of long-term strategies. In other words, they engage in myopic decision making such as cutting marketing and R&D expenses to boost short-term earnings, prioritizing sales over customer satisfaction, offloading inventory at fiscal closing, and withholding new product launches. These behaviors are commonly observed prior to seasoned equity offerings (SEOs), initial public offerings (IPOs), share repurchases, and C-suite retirements.

According to the survey, myopic decision making decreases “long-term growth investments by 17 percent, on average, when faced with a 15 percent decrease in revenue.” Myopic spending harms stakeholders, including investors, customers, and boards of directors. It is also associated with inferior stock market performance in the long run due to loss of market share and delayed innovation.

Predicting myopic marketing spending would help stakeholders prior to quarterly earnings calls. Investors, who are currently forced to wait until firms release quarterly financial statements to determine whether to buy, hold, or sell, could reallocate their investments and preserve more of their portfolio’s value. Additionally, the board of directors could react or intervene before the earnings call, not after.

In a , we propose a method for predicting myopic marketing behavior up to a year in advance. Our method involves analyzing the language that Top Management Teams, or TMTs, use in earnings calls. By parsing close to 11 million sentences extracted from nearly 25,000 quarterly earnings call transcripts between 2008 and 2019, we measure how TMTs discuss marketing and earnings and predict the likelihood of firms cutting their marketing and R&D spending.

Value for Investors

Our proposed approach offers actionable benefits.

• Predicting myopic marketing spending a year in advance will give investors access to private information, which can be used to create an arbitrage opportunity. Investors can use our approach to divest from firms before they suffer the detrimental, long-term consequences of myopic spending.

• Generating high-frequency forecasts (e.g., at the quarterly level) are more useful than existing approaches that use infrequent events such as SEOs, IPOs, and TMT retirements. Investors will have up to four opportunities a year to predict myopic marketing spending and thereby rebalance their investment portfolios.

• Compared to current approaches used to predict myopic marketing spending, our proposed method provides superior forecasting accuracy.

Lessons for Investors and Other Stakeholders

Our study’s findings reveal that executives are more likely to engage in myopic marketing spending when they discuss increasing earnings during quarterly earnings calls. Conversely, conversations about increasing marketing or decreasing earnings reduce the likelihood of such behavior in the future.

Investors:

Additionally, we compare the financial returns of firms that engage in myopic marketing spending to those that do not. We show that avoiding investing in myopic firms yields an additional 6.44% in returns over four years, which translates to 1.61% annual abnormal returns over existing prediction methods.

Corporate governance:

Previous research has shown that internal governance implemented through incentivization and information provision to subordinates of C-suite executives can reduce C-suite earnings management. With our approach, subordinates of the C-suite and other boards of directors can monitor TMT behavior. We suggest that internal and external governance entities pay attention to what TMTs say during earnings calls to reduce the problem of information asymmetry.

Competitors:

The early prediction ability could also be leveraged by firms’ competition. Intentions to engage in myopic marketing spending could translate into significant advance notice for formulating competitive strategies that can result in superior performance (e.g., product-market entry, R&D commitments).

Marketing officers:

Marketing firms and advertising agencies could gain strategic foresight into potential contract cancellations due to the firm’s intentions to cut marketing spending and engage the firm or alter plans accordingly.

Top management teams:

We anticipate that the reduced cost of monitoring the TMT’s myopic marketing spending behavior can have two potential outcomes:
 

1. Reduced monitoring cost would lead to greater oversight over TMT actions, which can lead to a decrease in myopic marketing spending.
   
2. TMTs may adapt their language to prevent detection, but our approach can be refined to adapt to changing TMT language.

Future work could analyze audio and video components of earnings calls to assess nonverbal predictors. Scholars could also focus on creating a continuous measure of myopic marketing spending to capture more variation.

Source: Andre Martin and Tarun Kushwaha, “,” Journal of Marketing.

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Crowdsourcing contests for marketing ideas such as new ads, graphics, and products have become popular based on the premise that no one is smarter than everyone. For example, PepsiCo asked consumers to create videos promoting Doritos in its “Crash the Super Bowl” ad contest, Fossil crowdsourced new packaging ideas, and Ben & Jerry’s “Do Us a Flavor” contest asked the public to create a mouthwatering ice cream flavor.

At the same time, many firms remain unsure about whether these contests pay off with investors and about the worth of their contest design choices. In a , we provide the first comprehensive examination of the stock market effects of these contests and, crucially, of the contest characteristics that may enable such contests to pay off.

We define a marketing ideation crowdsourcing contest (or MICC) as an open tournament-based call for ideas and solutions for marketing-related problems. In an MICC, a firm first broadcasts a call describing the marketing problem to be solved and any rules for the contestants. The firm then collects the submissions of possible solutions, evaluates those submissions using an expert panel or through crowd voting, and rewards the chosen contest winners. Typical MICCs include (1) promotion-focused crowdsourcing contests to develop ideas and solutions involving ads, logos, slogans, or package designs and (2) contests to conceptualize new product ideas.

Investors Have a Mixed View

Although these marketing ideation crowdsourcing contests can send positive signals to facilitate returns, we find that investors have a mixed view of them. These contests pay off with investors because they can create closer connections with consumers and can generate valuable new ideas that signal growth opportunities for the firm. However, they can also elevate the firm’s idiosyncratic risk because they make the brand’s future direction less clear. Results from an event study of 508 marketing ideation crowdsourcing contest announcements reveal that such contests significantly raise a firm’s stock price by .18% on average but also significantly increase idiosyncratic risk by .15%.

Results from an event study of 508 marketing ideation crowdsourcing contest announcements reveal that such contests significantly raise a firm’s stock price by .18% on average but also significantly increase idiosyncratic risk by .15%.

There remains a lack of understanding of how to design profitable crowdsourcing contests, particularly in terms of finding the “right crowd” and doing it “the right way.” Firms need to decide if they should invite external professionals or the general public for the contest and if they should rely on crowd voting or an expert panel to decide on the winner. Firms also need to choose how broadly to scope the task and whether to use the contest to develop new products or for promotion ideas.

We found that firms’ stock returns increase when the contest is targeted at professionals, when it includes crowd voting, and when the task has a specific scope. Returns further strengthen when contest design choices and the firm’s stated contest objective are aligned (i.e., when the firm states its goal is consumer engagement and its contest has crowd judging, as this empowers consumers). However, we find that the stock price bump does not differ between product-focused versus promotion-focused marketing crowdsourcing contests.

Lessons for Chief Marketing Officers

In addition, we explore the question, “for which firms do marketing ideation contests create more shareholder wealth?” Results show that brands’ relevant stature positively affects the stock market performance of MICCs, whereas brands’ energized differentiation—which is the brand’s uniqueness and ability to stand out from competition as well as its ability to meet future consumer needs—has a negative effect. Stock returns are also higher for smaller firms and those with strong brand awareness from advertising.

However, these contests can also create investor uncertainty. Investors may not be clear why firms turned to the crowd for such essential marketing tasks or what precisely the crowd will come up with. We find that these contests increase firm idiosyncratic risk, providing the first evidence of such contests’ downsides with investors. In addition, we find that investor uncertainty is heightened when it comes to task-related contest features (i.e., generally-scoped contests and contests to generate new product ideas).

Our findings provide valuable insights for chief marketing officers:

• Firms can now be more confident that their time and monetary investment on MICCs lead to increased stock returns. However, managers also need to consider that MICCs increase idiosyncratic risks.

• Contests targeting professional participants result in higher value and lower risks than MICCs targeting the general public. Involving the crowd in voting enhances the contest’s abnormal returns and also enhances buzz.

• Specific contests have higher returns and lower risks than more general contests, and promotion contests provide more favorable effects on risk than new product ideation contests.

In sum, marketers can be more strategic when designing their marketing crowdsourcing contests to enhance their firms’ shareholder wealth.

From: Zixia Cao, Hui Feng, and Michael A. Wiles, ,” Journal of Marketing.

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Higher education exposes students to novel ideas, fosters critical thinking, and gives them the tools needed to succeed in the global workforce. Indeed, college graduates earn 202% more than those who do not complete high school and 62% more than people whose highest degree is a high school diploma. Nevertheless, enrollments in American higher education institutions have decreased. Compared to 2021, graduate enrollments were down by 1.1% in the fall of 2022. Many students also continue to drop out of college degree programs, with the average graduation rate at public schools being 62%.

Lower graduation rates may be a result of students being forced to take on more debt as a result of rising college costs. This trend is evident in the current year, where the total amount of student loan debt in the United States alone is $1.745 trillion (Hanson & Checked, 2023). And student loans aren’t the only problem: Many people who do not take out enough loans end up using credit cards that have considerably higher interest rates to pay for their tuition and living expenses. In all, college debt is now the second-largest source of consumer debt in the U.S.

With college debt being such a life-changing issue, are prospective students correct in choosing cheaper college options? The authors of find that students’ aversion to the debt associated with student loans impairs their college choices, ultimately limiting their career choices and decreasing the odds of attending or graduating college. They propose the “Tuition Myopia Model,” which states that although the benefits of attending college are realized after graduation, students psychologically anticipate realizing the cost of their tuition before loan repayments are actually due. This hinders them from attaining higher earnings in the future by leading them to choose lower-cost, lower-return (LC-LR) colleges over higher-cost, higher-return (HC-HR) colleges. (Note that the idea of choosing between an LC-LR college and an HC-HR college may conjure thoughts of choosing between a state university and an expensive, elite, nonprofit private college. However, “LC-LR” and “HC-HR” are relative terms; a state university may be the LC-LR option in one choice pair and the HC-HR option in another choice pair. Roughly two-thirds of potential college choices involve a choice between an LC-LR college and an HC-HR college.)

One of the most striking findings is that that graduates from lower-cost, lower-return colleges are more likely to default on their student loans, implying that the minimization of student debt may not necessarily ensure future financial security.

One of the most striking findings is that that graduates from lower-cost, lower-return colleges are more likely to default on their student loans, implying that the minimization of student debt may not necessarily ensure future financial security. Evidently, about 18% of students who attended the least expensive category of universities (whose graduates earn less) defaulted on their student debts three years after graduating (Yoon et al. 2022).

To understand more about this trade-off in students’ college choices, we got in touch with the authors:

Q: The article mentions “decision aids such as the College Scorecard” are used to help students make college decisions. At what stage in the education process (e.g., elementary, high school) do you think such decision aids will be most effective in guiding students? Do you think making students aware of financial options, even when they are not actively thinking about college, will motivate them to pursue higher education?

A: The problem is not “when” but “how” to present such decision aids. When people search for a college on Google, the right side of the search page shows financial information about the college (i.e., average attending cost). Our findings suggest that the typical way in which this financial information is presented can lead students to make choices against their long-term interests. It can create “tuition myopia.” We find in our studies that people tend to feel the costs of tuition before the benefits of a higher salary, even when both are experienced after graduation. This earlier “realization” of the cost, rather than benefits, of college can, in many cases, lead them to choose cheaper colleges that net them less money over their lifetime than more expensive colleges that would provide larger lifetime returns.

Q: Your research addresses a very “real-time issue” regarding student loans. Often, researchers work on a real-time issue, but by the time the research is published, the issue might not be as relevant anymore. How can researchers ensure that they study timely and relevant topics?

A: I think it helps to study phenomena that are socially important, where existing theories make competing predictions. Student loan debt has been increasing for several decades and now exceeds all but mortgage debt…yet how students choose between colleges is a topic that hasn’t received much attention in the marketing literature. We noticed that government and nonprofit organizations gather and make college financial metrics publicly available to help people make better choices. Naturally, we were interested in how these decision aids would affect college choices. As we dug deeper, we discovered that this information can impair student choice, and there were a variety of plausible explanations. People might simply be averse to carrying a high degree of debt, for instance, or might be seeking to treat colleges like other assets and maximize their return on investment. These alternatives to our tuition myopia model made it a socially important and theoretically exciting topic that should matter to consumers for many years to come.

Q: According to the tuition myopia model, students cognitively understand the annual costs of attending a college at the start of each academic year, and those prices stay the same until graduation. Do you anticipate any boundary circumstances around this assumption that might have an impact on the precision and accuracy of the result?

A: The tuition myopia model (formula 2 in the main paper) looks a bit complicated with detailed specifications (e.g., realizing costs at the beginning of each school year), but it simply tries to capture the sense of early cost realization. Even with generous loans, students do not have to begin repaying until graduation. Prospective students psychologically realize or feel the financial loss incurred by the cost of college during enrollment, which is earlier than when they psychologically realize the gains they will derive from its financial returns (Study 1). In terms of model robustness, we tried really hard to crack it by testing a wide range of model parameters. We tested whether the model prediction holds under different loan interest rates (0%–11.85% APR), loan repayment periods (10–30 years), annual income growth rates (0%–3.9%), type of tuition (that is, in-state and out-of-state tuition), and even the calculation styles (applying different discount rates for gain and loss outcomes). We did find one exception. In Study 4, we found that when financial information aligned the costs incurred and financial returns (e.g., costs and returns per year after graduation), participants no longer exhibited tuition myopia. This reversal is promising, as it suggests that organizations can help students make better choices, if they change the way that financial information is conveyed.

Q: Could “early psychological realization” affect behavior in other contexts? For example, an individual on a diet program might psychologically realize weight loss even before the diet program (e.g., a program to reach a target weight) is completed, thereby increasing their caloric intake and rendering the diet program ineffective.

A: Yes, anticipatory emotions can affect behaviors in nonfinancial contexts. However, I would predict that people realize future costs earlier than future benefits. In our article, students realized losses (i.e., tuition payments after graduation) earlier than gains (i.e., salary after graduation), even though both occurred in the same distant future. In your diet example, this asymmetry might even be more exacerbated. People might be hesitant to start a diet because they both actually and psychologically realize the losses (i.e., what they’d give up) earlier than the gains (i.e., improved health and appearance).

Q: The article mentions that “a majority of students believe that expensive colleges can lead to better education, but as many as 76% eliminate college options based on their cost.” Do the students have a prospective rationalization of how they can overcome the disadvantage of a lower quality of education?”

A: Prospective students may choose lower-cost and lower-return colleges for various reasons other than tuition myopia. Students with high debt aversion might strategically choose lower-cost and lower-return colleges to avoid the higher-than-average psychological pain they would incur from a high debt burden after graduation. Unlike tuition myopia, these students are not necessarily short-sighted. Rather, they are far-sighted but particularly focused on their future debt balance. Still, their choice could create financial distress down the road. One of our analyses, based on the College Scorecard database (Department of Education), allowed us to categorize colleges from lower-cost and lower-return colleges to higher-cost and higher-return colleges. The database reported the three-year default rate (that is, how many students default on their debt three years after graduation). We discovered that 18% of students who attended the cheapest group of colleges (whose graduates earn less) defaulted on their student loans three years after graduation. By contrast, only 2.5% of students who attended the most expensive group of colleges (whose graduates earn more) defaulted during the same period (Web Appendix L). From an individual perspective, a smaller investment in a college education could lower future debt but also increase the risk of financial bankruptcy. Underestimating the value of positive outcomes of a college education can be detrimental.

Read the full article:

Haewon Yoon, Yang Yang, and Carey K. Morewedge (2022), “,” Journal of Marketing Research, 59 (1), 136–52. doi:.

References:

Hanson, M. and Checked, F. (2023), “Student Loan Debt Statistics [2023]: Average + Total Debt,” Education Data Initiative. Available at: (Accessed: January 20, 2023).

“How Student Enrollment Changed in 2022,” Higher Education Today. Available at: . (Accessed: January 20, 2023).

Bareham, H., “2022 College Graduation Statistics,” Bankrate. Available at: (Accessed: January 20, 2023).

Avery, C. and Turner, S. (2012) “Student Loans: Do College Students Borrow Too Much—or Not Enough?,” Journal of Economic Perspectives, 26 (1), 165–92. Available at: .

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IPOs based in the U.S. raised over $155 billion in 2021, a record year for IPO valuations. At the same time, insiders sold $35.5 billion in shares of companies that went public in 2021 in the U.S., . These insider sales are a negative signal of quality and typically reduce the value of IPOs.

In a , we focus on the role of innovation potential as a credible signal that reduces the adverse selection present in IPO deals with insider sales. Prior research shows that the managers of IPO firms have a strong tendency to remove information about future innovation from IPO prospectuses to prevent competitors from learning about their plans. In 40% of IPOs, managers seek to protect their competitive advantage by redacting information about upcoming products and what markets they are considering entering.

Our research, however, documents a positive effect on IPO valuation from informing investors of future innovation plans. It allows managers to reduce information asymmetry, offers background information that helps investors better gauge the impact of insider sales, and ultimately increases the value of the IPO.

To establish that innovation potential is a true signal of firm quality, which is unobservable to investors, we document its indirect effect on IPO valuation through the sale of insider shares at the time of an IPO. Sales of insider shares have been extensively shown to have a negative effect on IPO performance. We find that firms with higher innovation potential have lower sales of insider shares, and when these sales occur, firms incur a relatively lower stock price penalty.

Direct and Indirect Effects of Innovation Potential

Innovation potential not only impacts IPO first-day returns directly but also has an indirect effect of reducing the impact of insider sales on IPO valuation. We test these relationships using data from 370 IPOs from the consumer-packaged goods and pharmaceutical industries, where innovation potential is measured using patents, new product preannouncements, and generic references to future innovation in the IPO prospectus. Even if companies choose not to reveal any specifics about new products, generic mentions of future innovation alone can serve as credible signals of firm quality.

Some innovation potential proxies work better than others in terms of signaling the true quality of the firm. We find that patents have a stronger impact on insider sales than preannouncements and generic references of future innovation. This suggests that insiders appear to put more stock into technological innovation—which perhaps they perceive as more tangible—than in strategic actions or corporate communications that reflect a focus on market-based innovations. Also, preannouncements have the strongest impact on first-day IPO returns, suggesting that retail investors focus on the measure of innovation potential that is closest to commercialization.

Our results help investors better understand the conditions under which insider sales occur: on average, insiders are less likely to sell their holdings if the firm has a rich innovation pipeline. Insiders can sell either because they want to cash in for liquidity reasons or because they expect the value of the firm to drop in the future. The significant information asymmetry present at the time of the IPO may not allow investors to determine the motives behind insiders’ actions. If investors assume the latter reason underlies the sale, they will be inclined to pay a lower price for the IPO shares: Our model suggests that a change in insider sales from 0 to 1% decreases IPO first-day returns by 0.95%, on average.

Managerial Implications

Managers seeking to take their firms public can keep in mind the following:

1. New product preannouncements may be the strongest signal of innovation potential, and the total effect of preannouncements on IPO first-day returns is higher than that of patents and generic references of innovation. Investors appear to view preannouncements as the clearest indication that the IPO firm will be competitive. Preannouncing an additional new product increases the IPO value by $34.88 million, although in the pharmaceutical industry the value of preannouncements may be driven by the longer life cycle that characterizes products.
2. Should the managers of IPO firms not have a new product that is sufficiently developed, or if they are not comfortable preannouncing it, generic references of future innovation can also grab the attention of both underwriters and retail investors, and the direct positive effect on IPO first-day returns is higher than patents. Communicating the general direction of future innovation plans is itself sufficient to increase the valuation of an IPO firm, although not as much as product preannouncements.

. 

From: Zixia Cao, Reo Song, Alina Sorescu, and Ansley Chua, “,” Journal of Marketing.

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