News reports carrying positive or negative sentiment about a firm influence its stock market performance. This study examines how two firm-controllable marketing factors, advertising and marketing capability, moderate the relationship between news stories and firm stock returns. Analysis of a panel data set of more than 7,000 firm-month observations indicates asymmetric and complementary moderating roles of the two marketing variables: advertising reinforces the favorable impact of positive news on abnormal stock returns, and marketing capability mitigates the adverse impact of negative news. Moreover, these moderating effects operate through different stakeholders. Whereas the moderating effect of marketing capability is due to its influence on customers and thus affects the level and volatility of future cash flows, advertising moderates the effect of news through individual investors’ attention and response to the news. The econometric analysis accounts for potential endogeneity between news reports, stock returns, and marketing variables, and the results are robust to alternative measures and analysis approaches. The findings suggest the need for managers to broaden their stakeholder focus when evaluating advertising's returns and to communicate the value of marketing capability to investors.
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