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The Direct and Indirect Effects of Advertising Spending on Firm Value

January 2010
Journal of Marketing 74(1):20-33

DOI:10.1509/jmkg.74.1.20

Authors:

University of California, Los Angeles

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.

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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)

($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

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)

($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)

($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)

($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

R&D Investor Res

onse

Elasticity Elasticity Effects

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.

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

…

Log (MBR)

0.00

10000.00

20000.00

30000.00

40000.00

50000.00

60000.00

70000.00

…

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)

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

*Read as mentioned for Table 3

Figure W4

Market Valuation Shares for the PC

Competitors

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

Jan-

IBM

DELLHP

Apple

Compaq

* Share only reflects firms in our database.

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