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Does advertising spending really work? The intermediate role of analysts in the impact of advertising on firm value

  • Original Empirical Research
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Abstract

Both managers and investors are increasingly concerned with the impact of advertising spending on shareholder returns. This study investigates the analyst-based processes by which advertising may create firm value. Using a large longitudinal dataset with 1,052 firms over 20 years, we find that firms decreasing from the top 20% to the bottom 20% of advertising spending group when compared to all industry competitors would experience a drop of abnormal return by 4.08% in 1 year and a cumulative total of 81.6% in 20 years. Also, analyst activities partially mediate the impact of advertising on firm return and risk. These findings indicate that analysts may act to externally validate the business logic underlying the advertising expense. The more analysts factor in firm advertising spending and reflect it in their earnings forecasts, the more likely the benefits of advertising are channeled into firm value. The results bridge research interests across marketing, accounting, and finance disciplines and help managers understand how product and financial markets are united. Main Street could better align with Wall Street via corporate disclosure of advertising spending to equity analysts.

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Notes

  1. Following the majority of the literature, our study focuses on the impact of advertising spending. We assess the value of advertising-based marketing strategies, rather than advertising information (messages conveyed to consumers about the superiority of one brand over another; Joshi and Hanssens 2010).

  2. We acknowledge an anonymous reviewer for this insight.

  3. Prior research in finance and accounting supports that analysts expend greater effort to cover and interpret firm advertising spending (Barth et al. 2001). It is noted that “because a firm’s product quality and the value of its projects might not be perfectly correlated, outsiders such as investors cannot know the true value of firm products” (Chemmanur and Yan 2009, p. 41).

  4. Because our original sample is the universe of the firms, the value of advertising should be quite generalizable to all firms traded in the public. Yet, CRSP/COMPSTAT has no brand-level advertising data. Luckily, the alternative source of TNS media intelligence provides brand-level advertising data. Thus, we now have collected monthly data of advertising spending for 319 big companies over 1987 M1–2008 M12, aggregated from brands of a firm. The brand advertising spending includes expenses in TV, radio, outdoor, print, and Internet media outlets as tracked by TNS. We then aggregate the advertising spending from brand level to firm level so as to match firm stock prices and analyst forecasts (Mizik and Jacobson 2009). Again, the results are robust regarding the partial mediation role of analyst in the impact of advertising spending on firm value.

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Authors and Affiliations

  1. The University of Texas at Arlington, Arlington, TX, USA

    Xueming Luo

  2. Department of Accounting and Finance, University of North Florida, Jacksonville, FL, USA

    Pieter J. de Jong

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  1. Xueming Luo
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  2. Pieter J. de Jong
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Correspondence to Xueming Luo.

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The authors gratefully acknowledge the constructive insights from Donald R. Lehmann at Columbia University.

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Luo, X., de Jong, P.J. Does advertising spending really work? The intermediate role of analysts in the impact of advertising on firm value. J. of the Acad. Mark. Sci. 40, 605–624 (2012). https://doi.org/10.1007/s11747-010-0240-3

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