The effect of crowdsourcing contests on a company's stock and the idiosyncratic risks they create for investors

(Press-News.org) Researchers from University of Colorado Denver, Iowa State University, and Arizona State University published a new Journal of Marketing study that examines the stock market effects on these contests and the contest characteristics that may enable such contests to pay off.

The study, forthcoming in the Journal of Marketing, is titled “When Do Marketing Ideation Crowdsourcing Contests Create Shareholder Value? The Effect of Contest Design and Marketing Resource Factors” and is authored by Zixia Cao, Hui Feng, and Michael A. Wiles.

Crowdsourcing contests for marketing ideas such as new ads, graphics, and products have become quite 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. This new study provides 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.

The research team defines 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.

How Investors React to Crowdsourcing Contests Although these marketing ideation crowdsourcing contests can send positive signals to facilitate returns, investors have a mixed view of them. Cao explains that “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. Yet 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 announcements of marketing ideation crowdsourcing contests reveal such contests significantly raise a firm’s stock price by .18% on average but also significantly increase idiosyncratic risk by .15%.

Feng adds that “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.

The study finds 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, the stock price bump does not differ between product-focused versus promotion-focused marketing crowdsourcing contests.

Lessons for Chief Marketing Officers In addition, the study explores 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 these contests’ downsides with investors. In addition, we find that investor uncertainty is heightened when it comes to task-related contest features such as generally-scoped contests and contests to generate new product ideas,” says Wiles.

These 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.

Full article and author contact information available at: https://doi.org/10.1177/00222429231191446

About the Journal of Marketing 

The Journal of Marketing develops and disseminates knowledge about real-world marketing questions useful to scholars, educators, managers, policy makers, consumers, and other societal stakeholders around the world. Published by the American Marketing Association since its founding in 1936, JM has played a significant role in shaping the content and boundaries of the marketing discipline. Shrihari (Hari) Sridhar (Joe Foster ’56 Chair in Business Leadership, Professor of Marketing at Mays Business School, Texas A&M University) serves as the current Editor in Chief.
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About the American Marketing Association (AMA) 

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