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The Direct and Indirect Effects of Advertising Spending on Firm Value

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Abstract

Marketing decision makers are increasingly aware of the importance of shareholder value maximization, which calls for an evaluation of the long-term effects of their actions on product-market response and investor response. However, the marketing literature to date has focused on the sales or profit response of marketing actions, and the goals of marketing have traditionally been formulated from a customer perspective. Recently, there have been a few studies of the long-term investor response to marketing actions. The current research investigates one important aspect of this impact, the long-term relationship between advertising spending and market capitalization. The authors hypothesize that advertising can have a direct effect on valuation (i.e., an effect beyond its indirect effect through sales revenue and profit response). The empirical results across two industries provide support for the hypothesis that advertising spending has a positive, long-term impact on own firms' market capitalization and may have a negative impact on the valuation of a competitor of comparable size. The authors quantify the magnitude of this investor response effect for and discuss its implications for further research.
The Direct and Indirect Effects of Advertising Spending on Firm Value
Amit Joshi*
Dominique M. Hanssens
Web Appendix
Table W1: MONTHLY DATA DESCRIPTIVE STATISTICS
APPLE
ADVERTISING ($000) MV ($MM) PROFIT ($MM) R&D ($000) SALES ($MM)
Mean 5994.44 5182.03 8.60 37.76 572.43
Median 4859.95 4386.12 28.53 41.90 561.51
Std. Dev 4476.36 3153.20 58.36 11.85 147.61
COMPAQ
ADVERTISING ($000) MV ($MM) PROFIT ($MM) R&D ($000) SALES ($MM)
Mean 7256.21 18891.17 29.89 50.53 1371.17
Median 5456.80 11826.89 62.28 39.86 1295.98
Std. Dev 5959.21 15723.93 177.90 38.65 899.29
DELL
ADVERTISING ($000) MV ($MM) PROFIT ($MM) R&D ($000) SALES ($MM)
Mean 4874.66 25419.59 52.01 13.17 778.36
Median 1613.30 3416.57 23.80 7.29 475.41
Std. Dev 6383.941 34551.82 52.234 14.11719 678.9532
NIKE
ADVERTISING
($000)
MV
($MM)
PROFIT
($MM)
R&D
($000)
SALES
($MM)
Mean 14057.33 4787.89 56.28 28.05 825.44
Median 14455.90 4723.41 54.23 32.20 795.81
Std. Dev 5611.37 3988.30 74.67 24.27 518.65
HP
ADVERTISING ($000) MV ($MM) PROFIT ($MM) R&D ($000) SALES ($MM)
Mean 7366.96 40101.65 156.64 164.54 2342.60
Median 5753.90 38042.69 170.86 163.92 2575.32
Std. Dev 5899.29 25622.29 66.71 30.81 707.79
IBM
ADVERTISING ($000) MV ($MM) PROFIT ($MM) R&D ($000) SALES ($MM)
Mean 18957.61 75022.15 159.67 402.32 5369.06
Median 18576.10 56481.47 364.04 361.28 5196.40
Std. Dev 12282.14 46541.15 610.61 117.64 769.52
REEBOK
ADVERTISING
($000)
MV
($MM)
PROFIT
($MM)
R&D
($000)
SALES
($MM)
Mean 3312.62 597.40 9.49 16.49 274.87
Median 2691.90 605.51 8.36 16.73 266.81
Std. Dev 2003.75 689.60 23.78 5.41 117.15
K-SWISS
ADVERTISING
($000)
MV
($MM)
PROFIT
($MM)
R&D
($000)
SALES
($MM)
Mean 1319.07 100.60 2.10 3.82 15.43
Median 1188.30 77.06 1.56 2.96 13.88
Std. Dev 1253.70 255.39 6.05 2.08 22.84
SKECHERS
ADVERTISING
($000)
MV
($MM)
PROFIT
($MM)
R&D
($000)
SALES
($MM)
Mean 2448.60 155.77 2.41 1.41 61.10
Median 2347.70 166.57 2.78 1.53 68.58
Std. Dev 1270.81 230.32 8.77 1.79 62.64
Table W2: Results from Market-to-Book Model
Advertisin
g
R&D Investor Res
p
onse
Elasticity Elasticity Effects
A
pp
le .291*** .003
.016***
Compaq .154*** .296*
.008***
Dell .011* .127**
.008**
HP .020 .004
.007**
IBM .129* .096*
.012
Nike .109* .253
.007***
Reebok .096 .131
.010**
K-Swiss .082** -.010
.005
Skechers .131* .033
.010*
* Significant at p<.10 for a one-tailed test. ** Significant at p<.05 for a one-tailed test. *** Significant at p<.01 for a one-tailed test.
Table W3: List of Matching Firms Used to Calculate MFR
Firm Matching Firms
Apple
NCR, DEC, Xeros Corp, Pitney Bowes Inc, EMC Corp, Silicon Graphics, Micron Technologies,
Seagate Technology, Gateway Inc, Diebold Systems, Sun Microsystems
Compaq
NCR, Pitney Bowes, Sun Microsystems, Amdahl Corp, DEC, Xeros Corp, Creative
Technologies, Sprint Corp, Micron Technologies, Iomega Corp
Dell
Measures, Diebold, Stratus Computers, Seagate Technology, Amdahl Corp, Creative
Technologies, Micron Technologies, EMC Corp, Verifone Inc.
HP
DEC, Sprint, Bay Networks, Gateway 2000, Maxtor, NCR, EMC, Sun Microsystems, Palm Inc,
Pitney Bowes
IBM
NCR, Amdahl, Sun Microsystems, Silicon Graphics, DEC, Micron Technologies, Pitney Bowes,
EMC, Sprint Corp
Nike Gap, TJX Companies, Weyco Group, Timberland Co, Nine West Inc., Stride Rite Corp
Reebok Tommy Hilfiger, Warnaco Grp, Stage Stores, Russell Corp, Lands End, Abercrombie & Fitch,
K-Swiss
Vans, Wolverine World Wide, Lacrosse Footwear, LA Gear, Florsheim Shoe Co, Puma,
Deckers Corp
Skechers
Florsheim Shoe Co, Saucony, Rocky Shoes and Boots, Deckers, Brown Shoe Corp, Madden
Steven Ltd, Candies Inc
Figure W1
Market-to-Book ratio and Advertising in the PC industry*
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
n
n
n
n
n
Log (MBR)
0.00
10000.00
20000.00
30000.00
40000.00
50000.00
60000.00
70000.00
y
n
y
n
n
Ad Expenditures ($ '000)
*For ease of exposition, Market-to-Book ratio has been expressed in logs and advertising in levels
Figure W2
Market-to-Book ratio and Advertising in the Sporting Goods Industry*
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Log (MBR)
0
5000
10000
15000
20000
25000
30000
35000
40000
Ad Expenditures ($ '000)
*For ease of exposition, Market-to-Book ratio has been expressed in logs and advertising in levels
Figure W3
Forecast Error Variance Decomposition*:
An Illustration in the PC Industry
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
123456789
% of Variance due to Ad
Time Periods
Apple
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
123456789
% of Variance due to Ad
Time Periods
Compaq
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
123456789
% of Variance due to Ad
Time Periods
Dell
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
123456789
% of Variance due to Ad
Time Periods
HP
*Read as mentioned for Table 3
Figure W4
Market Valuation Shares for the PC
Competitors
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
Jan-
91
Jan-
92
Jan-
93
Jan-
94
Jan-
95
Jan-
96
Jan-
97
Jan-
98
Jan-
99
Jan-
00
IBM
DELLHP
Apple
Compaq
* Share only reflects firms in our database.
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