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Effect of analysts’ earnings pressure on marketing spending and stock market performance

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Abstract

Despite the clearly visible effects of analysts’ pressures on C-level executives in the popular press, there is limited evidence on their effects on marketing spending decisions. This study asks two questions. First, how do analysts’ pressures affect firms’ short-term marketing spending decisions? Based on a sample of 2706 firms during 1987–2009 compiled from Institutional Brokers Earning System, COMPUSTAT, and CRSP databases we find that firms cut marketing spending. Second, more importantly, we ask if firms which remained more committed in the past to marketing spending under analysts’ pressures have higher longer-term stock market performance. We find that the stock market performance of firms more committed to marketing spending under past periods of analysts’ pressures is higher. The findings are replicated for R&D spending and are robust across measures, controls, and methodologies. Consideration of two industry-based moderators, R&D spending and revenue growth, and one firm-based moderator, whether the firm is among the industry’s top four market share or other lower share firms, reveals that the findings are stronger for high R&D and growth industries and lower market share firms. One key implication is that top executives respond to analysts’ pressures by cutting marketing spending in the short term; however, if they can resist these pressures, longer-term stock market performance is higher.

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Notes

  1. GAAP requires marketing spending to be completely expensed in the current period while benefits may be observed much later.

  2. Following the definition, all such periods in the firm’s history between 1987 and 2009 are considered. Periods during which the firm does not exhibit commitment to marketing spending when under analysts’ pressure or when the firm is not under such pressure are not considered under the summation sign. We conduct analyses related to such periods in the additional analyses section to investigate whether consideration of such periods affects results of hypothesis testing to confirm the robustness of the result.

  3. It is not necessarily that, for example, MCmt in year 10 for firm A will be greater than MCmt in year 5 for firm B, even if an unlimited time frame is employed for the discounting. For example, if firm A had 10 of 10 years during which it did not maintain a commitment to marketing spending to sales ratio under analysts’ pressure, then dit-p in Eq. (7) will be 0 and hence MCmt will be zero. In contrast if firm B had 1 year of 5 during which it did maintain a commitment to marketing spending under analysts’ pressure dit-p will be 1 for that 1 year so that MCmt will be higher for firm B relative to firm A. MCmt is also based on the magnitude of unexpected marketing spending. Consequently, two firms which are similar on the number of years during which they are committed to marketing spending under analysts’ pressure, one firm can still have a higher MCmt than the other if one firm increases unexpected marketing spending more than the other.

  4. p is the time period which is variable across firms and comprises the entire history of the firm. If the history is 10 years p is 10. In addition to the entire history of the firm which varies over firms, we empirically tried several fixed values of p, 1–3, 5, and 10 years, to test whether the corresponding results are robust with respect to the statistically significant positive effect of commitment to marketing spending under analysts’ pressure on stock market performance (H2) reported in the paper.

  5. The measure proposed by Barber and Lyon (1997) requires choosing a control firm for each sample firm, from all firms in the same time period and two-digit standard industrial classification (SIC), with a market value of equity between 70% and 130% of that of the sample firm, and book-to-market ratio closest to that of the sample firm. We then calculate the unexpected return measure as the difference between the compounded stock market returns of the sample and matched firms.

  6. Another reason we aggregated to the year is because there are more missing values of marketing spending data at the quarterly level. In the additional analysis section, we conducted an analysis at the quarterly level based on quarterly earnings pressure and found that the results on H1 and H2 are robust relative to aggregation to the year.

  7. The data in Table 2 are purely descriptive. In other words, in Table 2 we compute the percentage of firms under earnings pressure during a certain period which cut marketing spending from the previous period. This computation does not employ the corresponding model or the associated control variables to determine marketing spending.

  8. The correlation between predicted and actual marketing spending is 0.70, showing the predictive power of the marketing spending model. The errors of Eq. 9 are found to be uncorrelated with the explanatory variables (correlations are less than 0.01).

  9. In Table 5,-.171 is statistically significantly different from 0 (p < .01) while −.03 is not statistically significantly different from 0.

  10. In Table 9 the coefficients for the effects of analysts’ pressure on marketing spending (for top four market share firms in an industry versus other firms) are statistically significantly different (p < .001).

  11. We checked whether the effect of commitment is curvilinear in Table 4 by adding the square term of the commitment variable in the regression, and found its coefficient estimates are mostly statistically insignificant, or significant with a turning point outside the data range, suggesting a positive effect of commitment within the sample range of the commitment variable.

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Acknowledgements

This work was supported by Dean's office of the UCI Merage School of Business, FQRSC (Fonds de recherche sur la société et la culture), SSHRC (Social Science and Humanities Research Council of Canada), and CEIBS faculty research grant.

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Authors and Affiliations

  1. Beall Center for Innovation and Entrepreneurship at the Paul Merage School of Business, University of California, Irvine, CA, 92697, USA

    Imran S. Currim

  2. John Molson School of Business, Concordia University, Quebec, Montreal, H3G 1M8, Canada

    Jooseop Lim

  3. China Europe International Business School, Shanghai, 201206, China

    Yu Zhang

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Currim, I.S., Lim, J. & Zhang, Y. Effect of analysts’ earnings pressure on marketing spending and stock market performance. J. of the Acad. Mark. Sci. 46, 431–452 (2018). https://doi.org/10.1007/s11747-017-0540-y

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