We have had occasion to address the sad situations in which a company is harmed by a scandal rocking its celebrity brand ambassador. New research reveals the impact these occurrences can have on the brand’s stock price. It also shows factors to consider when deciding how to respond to such a crisis.

The research by Stefan J. Hock, a marketing professor at the University of Connecticut in Storrs, and Sascha Raithel, a marketing professor at Freie Universität Berlin, explored a wide field: 128 events of negative publicity for a brand endorser affecting 230 publicly traded companies between 1988 and 2016. Of the celebrity endorsers, 59 percent were athletes while the rest were TV and radio personalities or musicians.

Hock and Raithel found that, in terms of effect on stock price, the crucial questions were whether or not the brand reacted to the scandal, how fast it reacted, and whether it maintained or suspended the relationship.

The researchers also found that the most important factors in terms of how to respond were the level of blame to the celebrity, how close the scandal related to the celebrity’s profession, how close the celebrity’s profession was tied to the product, and whether the celebrity apologized. (To determine some of these they surveyed marketing professionals. They also analyzed stock movements.)

The research finds the worst thing you can do is to make no statement about the situation and take no action. Yet, that’s the path most companies follow. Overall, 59 percent of the companies in the study did nothing, while 20 percent announced they’d keep the relationship and 21 percent suspended it or ended it, according to an article in the May-June 2019 issue of Harvard Business Review.

‘Gain Values’

It’s a shame most companies react as they do. One of the study’s conclusions is that handling such a crisis well can help the stock price. “The most surprising finding is that firms can gain value depending on their response,” according to the study’s abstract. “Announcements of firms’ reactions positively affect [abnormal stock returns], especially if they occur quickly after negative publicity surfaces.”

The researchers found that fast announcements (within three days) of firms’ reactions increase firm value by 2.1 percent over the next four trading weeks (while slow ones decrease it by 1.88 percent). Most importantly, the study shows it’s best to act: Issuing statements suspending or maintaining the endorser yielded more positive stock-price results than not reacting at all.

This provides a matrix for how to respond to these sad events. According to the abstract, “Firms have more positive [abnormal stock returns] when they (1) suspend higher-blame endorsers, (2) suspend endorsers whose negative publicity is related to their occupation, (3) maintain endorsers with a high product fit, and (4) do not suspend apologetic endorsers.”

Back in March 2016, we praised the handling by Russian tennis pro Maria Sharapova (pictured) of her positive test for a banned drug. In terms of how the brands she endorsed might respond, she was clearly to blame (though she said she didn’t realize the drug was banned) and the scandal was related to her occupation. On the other hand, she strongly apologized.

Porsche, Nike

As we noted, the two brands least related to tennis, Porsche and Tag Heuer, dropped Sharapova (Tag Heuer dropped negotiations with her), and another, Danone (Evian water), took a wait-and-see attitude. But one with a close fit to the tennis player — Nike— also suspended the relationship, while another, racket maker Head NV, stood by her.

The HBR article highlights a similar situation: Tiger Woods’ December 2009 altercation with his then-wife. Woods, whose sponsors included Accenture, AT&T, Gatorade, General Motors, Gillette, and Nike, was given low marks for his attempt at an apology. Yet the HBR notes that, while nonsports brands were more likely to drop him, Nike and others related to golf stood by him.

We suspect celebrity scandals aren’t going away. It’s good for marketers to know how they will affect them — and how to respond.

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