Skip to main content
SpringerLink
Log in

Sales margin and margin capitalization rates: linking marketing activities to shareholder value

  • Original Empirical Research
  • Published:
Journal of the Academy of Marketing Science Aims and scope Submit manuscript

Abstract

Using customer level data, prior marketing research has developed a micro or bottom up approach to link marketing activities with shareholder value. This study develops a macro or top down approach using longitudinal firm level data from publicly available financial statements. Test results show that the earnings component supported by sales has higher pricing multiples than other components of earnings in firm specific time-series data. We also test hypotheses of five marketing-related drivers of sales capitalization rate (the rate at which sales increases are converted into increased shareholder value). From the research effort, we develop three managerially useful tools. First, we suggest enterprises develop alpha or sales margin strategies and beta or margin capitalization strategies, and we show that one can map these strategies into a planning matrix. Second, using financial statements of publicly traded firms, we develop an alternative method of estimating customer equity. Third, we show how a company may use our macro approach and compare its performance with its industry competitors to develop insights into competitive dynamics.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Exhibit 1
Exhibit 2
Fig. 1
Fig. 2

Similar content being viewed by others

Notes

  1. Christie (1987) concludes that the market value of equity at the beginning of the returns period is the correct deflator in returns or change studies to control the effect of scale differences. In level studies where the dependent variable is the market value of equity, though, Barth and Kallapur (1996) suggest that including a scale proxy as an independent variable is more effective than deflation at mitigating coefficient bias.

  2. Considerable research on earnings response coefficient (ERC) in accounting has focused on the relation between price changes (or stock returns) and earnings changes (or unexpected earnings) to assess the information content of earnings (Collins and Kothari 1989). We added sales revenue to the ERC model to investigate the impact of sales activities to earnings and stock returns in Eqs. (4) and (5).

  3. The cash cycle also involves trade payables to suppliers, which we ignore in this discussion since our focus is on customers; however, we do include trade or accounts payable when measuring the cash cycle.

  4. Dechow (1994) predicts and finds that the longer the cash cycle, the more useful the earnings in equity valuation relative to cash flows. She uses a ship building firm to present the intuition behind her findings. Assume that the construction takes several accounting periods and the payment occurs on completion of the contract. The revenue recognition for this type of long-term construction projects is based on engineer’s estimate of the degree of completion. Therefore, realized cash flows for the firm could easily be negative in the early periods due to the acquisition required for the construction contract and earnings will be positive due to the revenue recognition and matching principle under U.S. generally accepted accounting principles. This example shows that earnings will better reflect the value-relevant events relative to cash flows when the cash cycle is long and earnings and cash flows differ by the greatest magnitude.

  5. We use other COMPUSTAT variables for identifying drivers of market impact of sales-supported earnings. The following lists all COMPUSTAT variables we used with numbers in the parenthesis representing data item numbers in annual COMPUSTAT. Sales (#12), income (#18), market value of equity (#25 x #199), research and development expense (#46), advertising expense (#45), cost of goods sold (#41), accounts receivable (#2), inventories (#3), accounts payable (#70), current assets (#4), and current liabilities (#5). In addition, we delete firm/years when sales are less than $10 million or the stock price is less than $1 following Barth et al. (2001). Finally, we delete observations when the book value of equity is negative because the market-to-book ratio makes no sense in this case.

  6. The Kolmogorov-Smirnov D statistics show that 343 firms (22.67%) fail to satisfy the normality assumption at the 5% level of significance. Note that no statistical tests are performed on Eq. 1.

  7. The mean (median) correlation between stock return and ∆SMAR is 0.301 (0.405). The mean (median) correlation between stock return and ∆ERFS is 0.237 (0.302). The firm-specific correlation between ∆SMAR and ∆ERFS is zero due to our orthogonalization schedule. We performed two diagnostics (error normality and heteroscedasticity). The Kolmogorov-Smirnov D statistics show that 85 firms (8.96%) fail to satisfy the normality assumption at the 5% level of significance. Other test results were insensitive when we limited our analysis to those firms satisfying the normality assumption. When we estimated the heteroscedasticity consistent standard errors using ACOV option in PROC REG of SAS, at the 5% level of significance, the number of firms with b1 greater than b2 has increased from 175 firms to 267 firms and the number of firms with b1 less than b2 has increased from 78 firms to 141 firms. Note that White’s (1980) asymptotically consistent estimator has no impact of the parameter estimates.

  8. Teets and Wasley (1996) compare mean earnings response coefficients (ERC) from linear time-series regressions to earnings response coefficients from pooled linear regressions and argue that firm-specific regressions are superior to pooled regressions. Freeman et al. (2002) provide an alternative interpretation on the findings of Teets and Wasley (1996) and report the average ERC of 2.71 from the firm-specific linear regression and ERC of 0.43 from the pooled linear regression.

  9. Test results were insensitive when we replaced the median values with the mean values of each company.

  10. The analyst could, of course, make a different assumption if warranted. For instance, sales could be assumed to continue for t time periods and not an infinite time period and one could assume the annuity of sales-supported margins are not even over time.

  11. The present value of $ in annuity can be written as \( {b_1} = 1 + \frac{1}{{1 + i}} + ... + \frac{1}{{{{(1 + i)}^n}}} = 1 + \frac{{1 - \frac{1}{{{{(1 + i)}^n}}}}}{i}, \) where i is the discount rate. Solving the equation for n, you get \( n = \frac{{ - \log \left[ {1 - \left( {{b_1} - 1} \right)i} \right]}}{{\log \left( {1 + i} \right)}}. \) The present value of $1 in perpetuity can be written as \( {b_1} = 1 + \frac{1}{{1 + i}} + \frac{1}{{{{(1 + i)}^2}}}... = 1 + \frac{1}{i}. \)

  12. One industry (electronic equipment) shows about even margin capitalization rates between small and large firms.

References

  • AAA Financial Accounting Standards Committee. (2001). Evaluation of the lease accounting proposed in G4 + 1 special report. Accounting Horizons, 15(3), 289–298.

    Article  Google Scholar 

  • Ailawadi, K. L., Lehmann, D. R., & Neslin, S. A. (2003). Revenue premium as an outcome measure of brand equity. Journal of Marketing, 67, 1–17.

    Article  Google Scholar 

  • Barth, M. E., Cram, D. P., & Nelson, K. K. (2001). Accruals and the prediction of future cash flows. The Accounting Review, 76, 27–58.

    Article  Google Scholar 

  • Barth, M., & Kallapur, S. (1996). The effects of cross-sectional scale differences on regression results in empirical accounting research. Contemporary Accounting Research, 13(2), 527–567.

    Google Scholar 

  • Bharadwaj, N., & Rao, R. (2009). Towards a resolution of The Paradox of Marketing. Journal of Marketing (forthcoming).

  • Blattberg, R. C., Getz, G., & Thomas, J. S. (2001). Customer equity: building and managing relationships as valuable assets. Boston: Harvard Business School.

    Google Scholar 

  • Bolton, R. (2006). The implication of “Big M” marketing for modeling service and relationships. Marketing Science, 26, 584–586.

    Article  Google Scholar 

  • Borle, S., Singh, S. S., & Jain, D. C. (2008). Customer lifetime value measurement. Management Science, 54, 110–112.

    Article  Google Scholar 

  • Capon, N., Farley, J., & Hoenig, S. (1990). Determinants of financial performance: a meta-analysis. Management Science, 36, 1143–1159.

    Article  Google Scholar 

  • Christie, A. A. (1987). On cross-sectional analysis in accounting research. Journal of Accounting and Economics, 9, 231–258.

    Article  Google Scholar 

  • Collins, D., & Kothari, S. P. (1989). An analysis of intertemporal and cross-sectional determinants of earnings response coefficients. Journal of Accounting and Economics, 11, 143–181.

    Article  Google Scholar 

  • Day, G., & Fahey, L. (1988). Valuing market strategies. Journal of Marketing, 52(3), 45–57.

    Article  Google Scholar 

  • Dechow, P. M. (1994). Accounting earnings and cash flows as measures of firm performance: the role of accounting accruals. Journal of Accounting and Economics, 18, 3–42.

    Article  Google Scholar 

  • Doyle, P. (2000). Value-based marketing. Journal of Strategic Management, 8(4), 299–311.

    Google Scholar 

  • Eberhart, A. C., Maxwell, W. F., & Siddique, A. R. (2004). An examination of long-term abnormal stock returns and operating performance following R&D increases. The Journal of Finance, LIX(2), 623–650.

    Article  Google Scholar 

  • Erickson, G., & Jacobson, R. (1992). Gaining comparative advantage through discretionary expenditures: the returns to R&D and advertising. Management Science, 38(9), 1264–1279.

    Article  Google Scholar 

  • Ertimur, Y., Livnat, J., & Martikainen, M. (2003). Differential market reactions to revenue and expense surprise. Review of Accounting Studies, 9, 185–211.

    Article  Google Scholar 

  • Fama, E. F., & French, K. R. (1997). Industry costs of equity. Journal of Financial Economics, 43, 153–193.

    Article  Google Scholar 

  • Freeman, R., Koch, A., & Li, H. (2002). Do firm-specific ERCs help explain price responses to earnings news? Austin: University of Texas, Working Paper.

    Google Scholar 

  • Ghosh, A., Zhaoyang, Gu, & Jain, P. C. (2005). Sustained earnings and revenue growth, earnings quality, and earnings response coefficients. Review of Accounting Studies, 10, 33–57.

    Article  Google Scholar 

  • Gupta, S., & Lehmann, D. R. (2003). Customers as assets. Journal of Interactive Marketing, 17, 9–24.

    Article  Google Scholar 

  • Gupta, S., & Zeithaml, V. (2006). Customer metrics and their impact on financial performance. Marketing Science, 25, 718–739.

    Article  Google Scholar 

  • Gupta, S., Lehmann, D. R., & Stuart, J. A. (2004). Valuing customers. Journal of Marketing Research, XLI, 7–18.

    Article  Google Scholar 

  • Hanssens, D. M., Rust, R. T., & Srivastava, R. K. (2009). Marketing strategy and wall street: nailing down marketing’s impact. Journal of Marketing, 73, 115–118.

    Article  Google Scholar 

  • Hayn, C. (1995). The information content of losses. Journal of Accounting and Economics, 20, 125–153.

    Article  Google Scholar 

  • Homburg, C., Workman, J., & Krohmer, H. (1999). Marketing’s influence within the firm. Journal of Marketing, 63, 1–17.

    Article  Google Scholar 

  • Joshi, A., & Hanssens, D. (2010). The direct and indirect effects of advertising spending on firm value. Journal of Marketing, 74, 20–33.

    Article  Google Scholar 

  • Keith, R. J. (1960). The marketing revolution. Journal of Marketing, 24, 35–38.

    Article  Google Scholar 

  • Kim, O., Lim, S. C., & Park, T. (2009). Measuring the impact of sales on earnings and equity price. Review of Quantitative Finance and Accounting, 32(2), 145–168.

    Article  Google Scholar 

  • Kothari, S. P. (2001). Capital market research in accounting. Journal of Accounting and Economics, 31, 105–231.

    Article  Google Scholar 

  • Kothari, S. P., & Zimmerman, J. L. (1995). Price and return models. Journal of Accounting and Economics, 20, 155–192.

    Article  Google Scholar 

  • Krasnikov, A., Mishra, S., & Orozco, D. (2009). Evaluating the financial impact of branding using trademarks: a framework and empirical evidence. Journal of Marketing, 73, 154–166.

    Article  Google Scholar 

  • Kumar, V., & Shah, D. (2009). Expanding the role of marketing: from customer equity to market capitalization. Journal of Marketing, 73, 119–136.

    Article  Google Scholar 

  • Lehmann, D. R., & Reibstein, D. J. (2006). Marketing metrics and financial performance. Cambridge: Marketing Science Institute.

    Google Scholar 

  • Lennox, C., & Park, C. W. (2006). The informativeness of earnings and management’s issuance of earnings forecast. Journal of Accounting and Economics, 42, 439–458.

    Article  Google Scholar 

  • Lewis, M. (2006). Customer acquisition promotions and customer asset value. Journal of Marketing Research, XLIII, 195–203.

    Article  Google Scholar 

  • Lusch, R. F., & Harvey, M. G. (1994). Opinion: the case for an off-balance sheet controller. Sloan Management Review, 35, 101–105.

    Google Scholar 

  • McAlister, L., Srinivasan, R., & Kim, M. C. (2007). Advertising, research and development, and systematic risk of the firm. Journal of Marketing, 71(1), 35–48.

    Article  Google Scholar 

  • McNamara, C. P. (1972). The present status of the marketing concept. Journal of Marketing, 36, 50–57.

    Article  Google Scholar 

  • Mizik, N., & Jacobson, R. (2003). Trading off between value creation and value appropriation: the financial implications of shifts in strategic emphasis. Journal of Marketing, 67, 63–76.

    Article  Google Scholar 

  • Moorman, C., & Rust, R. T. (1999). The role of marketing. Journal of Marketing, 63(Special Issue), 180–197.

    Article  Google Scholar 

  • Natarajan, R. (1996). Stewardship value of earnings components: additional evidence on the determinants of executive compensation. The Accounting Review, 71, 1–22.

    Google Scholar 

  • Nath, P., & Mahajan, V. (2008). Chief marketing officers: a study of their presence in firm’s top management team. Journal of Marketing, 72(1), 65–81.

    Article  Google Scholar 

  • Norris, F. (2009). When the American auto industry was owned by investors, it acted like a government enterprise. New York Times (November 20), B1.

  • O’Sullivan, D., & Abela, A. V. (2007). Marketing performance measurement ability and firm performance. Journal of Marketing, 71(2), 79–93.

    Article  Google Scholar 

  • Rao, R., & Bharadwaj, N. (2008). Marketing initiatives, expected cash flows, and shareholders’ wealth. Journal of Marketing, 72, 16–26.

    Article  Google Scholar 

  • Rappaport, A. (1983). Creating Shareholder value. New York: The Free.

    Google Scholar 

  • Rust, R. T., Moorman, C., & Dickson, P. (2002). Getting return on quality: revenue expansion, cost reduction, or both? Journal of Marketing, 66, 7–24.

    Article  Google Scholar 

  • Rust, R. T., Lemon, K., & Zeithaml, V. (2004). Return on marketing: using customer equity to focus marketing strategy. Journal of Marketing, 68, 109–127.

    Article  Google Scholar 

  • Srinivasan, S., & Hassens, D. M. (2009). Marketing and firm value: metrics, methods, findings, and future directions. Journal of Marketing Research, 46, 293–312.

    Article  Google Scholar 

  • Srivastava, R. K., Shervani, T. A., & Fahey, L. (1998). Market-based assets and shareholder value: a framework for analysis. Journal of Marketing, 62, 2–18.

    Article  Google Scholar 

  • Srivastava, R. K., Shervani, T. A., & Fahey, L. (1999). Marketing, business processes, and shareholder value: an organizationally embedded view of marketing activities and the discipline of marketing. Journal of Marketing, 63(Special Issue), 168–179.

    Article  Google Scholar 

  • Teets, W. R., & Wasley, C. (1996). Estimating earnings response coefficients: pooled versus firm-specific models. Journal of Accounting and Economics, 21, 279–295.

    Article  Google Scholar 

  • Venkatesan, R., & Kumar, V. (2004). A customer lifetime value framework for customer selection and resource allocation strategy. Journal of Marketing, 68, 106–125.

    Article  Google Scholar 

  • Webster, F. E., Jr. (1981). Top management concerns about the marketing function. Journal of Marketing, 45, 9–16.

    Article  Google Scholar 

  • Webster, F. E. (1992). The changing role of marketing in the corporation. Journal of Marketing, 56, 1–17.

    Article  Google Scholar 

  • White, H. (1980). A heteroscedasticity consistent covariance matrix estimator and a direct test for heteroscedasticity. Econometrica, 48, 817–838.

    Article  Google Scholar 

  • Wiesel, T., Skiera, B., & Villanueva, J. (2008). Customer equity: an integral part of financial reporting. Journal of Marketing, 72, 1–14.

    Article  Google Scholar 

Download references

Acknowledgement

The authors would like to thank the Marketing Science Institute for financial support of this research and Bill Cron, Mark Houston, Oliver Kim, David Kuhne, Steve Lusch, Korea University, Seoul National University, and Texas Christian University for their comments and suggestions. Steve Lim also thanks the Charles Tandy American Enterprise Center at TCU for financial support. We thank James Carver for assistance on this project.

Author information

Authors and Affiliations

  1. M.J. Neeley School of Business, Texas Christian University, Fort Worth, TX, USA

    Steve C. Lim

  2. James and Pamela Muzzy Chair in Entrepreneurship, Eller College of Management, University of Arizona, Tucson, AZ, USA

    Robert F. Lusch

Authors
  1. Steve C. Lim
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Robert F. Lusch
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Robert F. Lusch.

Appendix: How Sales Capitalization (c 1) Equals the Sales Margin (a 1) Multiplied by the Margin Capitalization Rate (b 1)

Appendix: How Sales Capitalization (c 1) Equals the Sales Margin (a 1) Multiplied by the Margin Capitalization Rate (b 1)

We want to show that c1 = a 1b1, where c1 is the coefficient in the regression of R on ΔS, a 1 is the coefficient in the regression of ΔY on ΔS, and b1 is the coefficient of SMAR in the regression of R on SMAR and ERFS. SMAR is the portion of ΔY that moves with ΔS. More specifically:

$$ {c_1} = \frac{{Cov(R,\Delta S)}}{{Var(\Delta S)}}{\hbox{ and }}{a_1} = \frac{{Cov(\Delta Y,\Delta S)}}{{Var(\Delta S)}}. $$

Meanwhile,

$$ SMAR = {a_0} + {a_1}\Delta S{ }and{ }ERFS = \Delta Y - ({a_0} + {a_1}\Delta S). $$

We can verify that SMAR and ERFS are orthogonal to each other, i.e.,

$$ Cov(SMAR,ERFS) = {a_1}Cov(\Delta Y,\Delta S) - a_1^2Var(\Delta S) = 0. $$

Given the zero correlation between the two independent variables,

$$ {b_1} = {a_1}\frac{{Cov(R,\Delta S)}}{{a_1^2Var(\Delta S)}} = \frac{{Cov(R,\Delta S)}}{{Cov(\Delta Y,\Delta S)}}. $$

Thus,

$$ {a_1}{b_1} = \frac{{Cov(R,\Delta S)}}{{Var(\Delta S)}} = {c_1}. $$

Rights and permissions

Reprints and permissions

About this article

Cite this article

Lim, S.C., Lusch, R.F. Sales margin and margin capitalization rates: linking marketing activities to shareholder value. J. of the Acad. Mark. Sci. 39, 647–663 (2011). https://doi.org/10.1007/s11747-010-0226-1

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11747-010-0226-1

Keywords

Search

Navigation