Kylie Jenner and Snapchat show how celebrity can affect the stock market — for better or worse

Snap Inc.’s stock value tanked a day after Kylie Jenner tweeted her dissatisfaction with the Snapchat app, proving that a high-profile celebrity can cause knee-jerk drop or rise in stock market.

With rising popularity of social media, celebrities’ activities are increasingly playing a significant role in the stock market.

In fact, firms today use celebrity endorsement to manipulate the stock markets. At very least, celebrity endorsement has become one of the most popular and effective marketing tools.

A celebrity can attract new users and revive a product that has lost market share by creating new interest from consumers.

A high-profile celebrity can enhance brand equity and recognition, build brand credibility in a short period of time and position a brand, and even affect consumers’ attitude towards a brand; enhance brand recognition.

The abnormal stock market return may result from a celebrity’s positive or negative event.

(An abnormal return is the return generated by a stock over a period of time that is higher than the return generated by its benchmark, or the expected rate of return. For example, if a stock is increased by 5 per cent after the listed firm announced signing a high-profile celebrity to endorse its brand, and the average market only increases by 3 per cent, then the abnormal return is 2 per cent).

Celebrities’ expertise, perceived trustworthiness, attractiveness, familiarity, and likeability play a big role in attracting consumers.

In the case of Kylie Jenner, her use of social media as a tool of seeming daily communication and promotion of her own life would make her something of an expert in the usefulness, or otherwise, of Snapchat.

Add to that her perceived attractiveness, familiarity — thanks to all that exposure — and imagined likeability, and she could be considered very influential indeed with Snapchat’s target user market — young people.

Young consumers tend to be enticed to purchase a brand’s products endorsed by a celebrity who is attractive and has a similar age.

Does the celeb walk the walk?

The celebrity effect can be improved when the endorsing celebrity matches endorsed product.

Match-up endorsement has a positive psychology effect on brand recall rate, shifts attention from spokesperson to brand, and improves attitudes towards advertisement.

Celebrity endorsement becomes a form of co-branding and/or brand alliance, which often makes an endorsed brand difficult to replicate.

Sport consumers would have more positive attitudes when athlete celebrities endorsed sport brands than non-sport products. Research shows that match-up endorsement generates significant abnormal stock return.

You would expect Tiger Woods to endorse golf related brands, not high-tech products.

Consumers prefer someone who has relevant expertise on the product to endorse the quality, rather than a famous actor or a sports star. For instance, health professionals or doctors, rather than actors or TV hosts would be more appropriate to endorse health supplements or medical products. Technical experts have more credit to endorse high-tech-oriented products.

Expensive celebrities worth the outlay

Investors are particularly interested in investing the firm that uses celebrities in the right profession with good reputations. Using an expensive celebrity is indicative of the firm’s financial capability. Stock markets react to the worthiness of the endorsing celebrity. This triggers firms to employ Hollywood stars despite the endorsement fees.

Brad Pitt earned US$3 million from Cadillac for promo work. A Chinese mobile firm OPPO paid Leonardo DiCaprio $5 million for endorsing its products. The average endorsement fee for Jackie Chan (the Kung Fu star) is $2.5 million.

However, the influence and effectiveness of celebrity endorsement is far more complex than you may intuitively believe, and there are more factors to consider before engaging with celebrity endorsement.

Many firms tend to choose a certain celebrity based on his or her fame and popularity. A firm may sign up with a few celebrities to endorse their brand and hope to generate multiple effects, or several firms may use the same celebrity to endorse a wide range of brands and products, regardless of the celebrity’s relevance to each brand.

This type of multiple endorsement — known in the industry as vamping — can be confusing to consumers and eventually become counterproductive, leading to a loss of trust in the celebrity.

There are other ways in which the public can lose trust in a celebrity.

A scandal in Tiger Woods’ personal life in 2009 resulted in consumers following the stories about his extramarital affairs rather than the brands he endorsed.

And Britain’s favourite footballer David Beckham ended up spending more time endorsing products than playing his game.

Intelligent consumers no longer fall for such endorsement, and further when a celebrity’s fame is fading or trending negative, the brands endorsed by him or her may become less popular.

Celebrity a turn-off in high-tech

In the case of high-tech firms, stock market reacts negatively to celebrity endorsement for high-tech products.

Investors believe that celebrity endorsement becomes a mere marketing tool to promote the brand and attract consumers’ attention. In many cases, celebrities are motivated by endorsing fee or commission but may not even understand the product attributes or functions, except being trained to say or act what is instructed.

My own recent research, conducted with Lei Zhang, shows that unmatched celebrity — meaning using high-profile celebrities rather than matched high-tech experts — has negative impact on the firm’s stock market return.

Investors have become alert and developed caution towards celebrity endorsements.

The firm’s listed book value plays an important role in abnormal stock return. The book value is indicative of the firm’s financial status. If the listed value is comparatively low, investors may perceive it as a high-risk investment, despite popularity of the endorsing celebrity.

In some cases, using a popular celebrity for firms with low financial value is detrimental to shareholders’ equity and result in financial loss. When a firm has a sound financial status, celebrity endorsement generates positive abnormal stock return.

Catherine Prentice is an associate professor in the marketing department of Griffith Business School.