Advertising Spending and Market Capitalization

Marketing decision makers are increasingly aware of the importance of shareholder value maximization, which calls for an evaluation of the long-run effects of their actions on product-market response as well as investor response. However, the marketing literature to date has focused on the sales or profit response of marketing actions such as advertising spending and new-product development, and the goals of marketing have traditionally been formulated from a customer perspective. There have been no studies of the long-term investor response to marketing actions, in particular the stock price of publicly traded firms. Our research investigates one important aspect of this impact, the long-run relationship between advertising spending and market capitalization. We hypothesize that advertising can have a direct effect on valuation, i.e., an effect over and above its indirect effect via revenue and profit response. Our empirical test is based on 10 years of monthly data for several PC manufacturers. We use multivariate time-series methods that disentangle the long-run effects and short-run effects, as well as the direct and the indirect effects of advertising on firm valuation. The results are categorized as customer response effects (the impact of advertising and R&D expenditures on sales and profits) and investor response effects (the net effect on the value of the firm). The empirical results provide support for our hypothesis that advertising spending has a positive and long-run impact on firms’ market capitalization. Thus, even if productmarket response to the advertising is demonstrably weak, investors are willing to pay a premium for aggressive advertisers. We quantify the magnitude of this investor response effect and discuss its implications for future research.

[1]  G. Erickson,et al.  Gaining comparative advantage through discretionary expenditures: the returns to R&D and advertising , 1992 .

[2]  R. C. Merton,et al.  Presidential Address: A simple model of capital market equilibrium with incomplete information , 1987 .

[3]  M. Hirschey,et al.  Advertising, R&D Expenditures and the Market Value of the Firm , 1993 .

[4]  Dominique M. Hanssens,et al.  The Category-Demand Effects of Price Promotions , 2000 .

[5]  Albert V. Bruno,et al.  The market value process : bridging customer and shareholder value , 1996 .

[6]  Avanidhar Subrahmanyam,et al.  Brand Perceptions and the Market for Common Stock , 2001 .

[7]  Robert Jacobson,et al.  The Financial Rewards of New Product Introductions in the Personal Computer Industry , 2003, Manag. Sci..

[8]  Vicki R. Lane,et al.  Stock Market Reactions to Brand Extension Announcements: The Effects of Brand Attitude and Familiarity , 1995 .

[9]  Dan Horsky,et al.  Does it Pay to Change Your Company's Name? A Stock Market Perspective , 1987 .

[10]  Dominique M. Hanssens,et al.  The Long-Term Effects of Price Promotions on Category Incidence, Brand Choice, and Purchase Quantity , 2002 .

[11]  Frank M. Bass,et al.  Pooling Issues and Methods in Regression Analysis with Examples in Marketing Research , 1975 .

[12]  Lorne N. Switzer,et al.  The stock market's valuation of R&D spending and market concentration , 1992 .

[13]  Ida E. Berger,et al.  The Effect of Advertising on Attitude Accessibility, Attitude Confidence, and the Attitude-Behavior Relationship , 1989 .

[14]  D. Aaker,et al.  The Financial Information Content of Perceived Quality , 1994 .

[15]  Gur Huberman,et al.  Familiarity Breeds Investment , 1999 .

[16]  Randall L. Schultz,et al.  A Study of Marketing Generalizations , 1980 .

[17]  David A. Aaker,et al.  The Value Relevance of Brand Attitude in High-Technology Markets , 2001 .

[18]  Gerard J. Tellis,et al.  An Analysis of the Tradeoff between Advertising and Price Discounting , 1991 .

[19]  Lynette Knowles Mathur,et al.  An Analysis of the Wealth Effects of Green Marketing Strategies , 2000 .

[20]  P. Tuominen.  Managing Brand Equity , 1999 .

[21]  Dominique M. Hanssens,et al.  The Long-Term Impact of New-Product Introductions and Promotions on Financial Performance and Firm Value , 2003 .

[22]  Lynette Knowles Mathur,et al.  The wealth effects associated with a celebrity endorser: The Michael Jordan phenomenon , 1997 .

[23]  G. Morbey,et al.  How R&D Affects Sales Growth, Productivity and Profitability , 1990 .

[24]  Cynthia A. Montgomery,et al.  Sources of superior performance: market share versus industry effects in the U. S. brewing industry , 1991 .

[25]  R. Jacobson,et al.  Trading off between Value Creation and Value Appropriation: The Financial Implications of Shifts in Strategic Emphasis , 2003 .

[26]  Robert C. Blattberg,et al.  How Promotions Work , 1995 .

[27]  Sunil Gupta,et al.  Customers as assets , 2003 .

[28]  A. M. Robert Taylor,et al.  Recursive and rolling regression-based tests of the seasonal unit root hypothesis , 2001 .

[29]  Dominique M. Hanssens,et al.  Empirical Generalizations About Market Evolution and Stationarity , 1995 .

[30]  E. Fama.  EFFICIENT CAPITAL MARKETS: A REVIEW OF THEORY AND EMPIRICAL WORK* , 1970 .

[31]  Bernard J. Jaworski,et al.  Information Processing from Advertisements: Toward an Integrative Framework , 1989 .

[32]  Z. Griliches,et al.  Industry Effects and Appropriability Measures in the Stock Markets Valuation of R&D and Patents , 1987 .

[33]  A. Jaffe.  Technological Opportunity and Spillovers of R&D: Evidence from Firms&Apos; Patents, Profits and Market Value , 1986 .

[34]  Peter Doyle,et al.  Value-based marketing: marketing strategies for corporate growth and shareholder value , 2012 .

[35]  Dominique M. Hanssens,et al.  Sustained Spending and Persistent Response: A New Look at Long-Term Marketing Profitability , 1999 .

[36]  J. V. Reenen,et al.  The Profitability of Innovating Firms , 1993 .

[37]  Z. Griliches.  Market Value, R&D, and Patents , 1981 .

[38]  Leonard J. Parsons,et al.  The Product Life Cycle and Time-Varying Advertising Elasticities , 1975 .

[39]  Valarie A. Zeithaml,et al.  Driving customer equity : linking customer lifetime value to strategic marketing decisions , 2001 .

[40]  Dominique M. Hanssens,et al.  The Persistence of Marketing Effects on Sales , 1995 .

[41]  Mary W. Sullivan,et al.  The Measurement and Determinants of Brand Equity: A Financial Approach , 1993 .

[42]  Sridhar Moorthy,et al.  Advertising Spending and Perceived Quality , 2000 .

[43]  J. Farley,et al.  How Advertising Affects Sales: Meta-Analysis of Econometric Results , 1984 .

[44]  G. Chow.  Tests of equality between sets of coefficients in two linear regressions (econometrics voi 28 , 1960 .

[45]  Leonard M. Lodish,et al.  A Summary of Fifty-Five In-Market Experimental Estimates of the Long-Term Effect of TV Advertising , 1995 .

[46]  Josef Lakonishok,et al.  The Stock Market Valuation of Research and Development Expenditures , 1999 .

[47]  D. Larcker,et al.  Are nonfinancial measures leading indicators of financial performance? An analysis of customer satisfaction , 1998 .

[48]  Dun Gifford.  The Value of Going Green , 1997 .

[49]  P. Perron,et al.  Testing For A Unit Root In A Time Series With A Changing Mean , 1990 .