Cointegration Analysis of the Advertising-Sales Relationship

The examination of stochastic properties of the annual advertising and sales data from the Lydia Pinkham Company reveals that the series are cointegrated and, therefore, possess a long-run equilibrium condition. According to the estimates of the error correction model of the series, in the short-run advertising is found to be more responsive than sales in adjustments to eliminate departures from the long-run equilibrium condition. The author's analysis, in general, implies that the observed business firms' decision rules fixing advertising spending as a percentage of sales revenue may hold as a long-run equilibrium condition. Copyright 1991 by Blackwell Publishing Ltd.

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