• Corpus ID: 16626487

Advertising Spending and Market Capitalization

@inproceedings{Joshi2004AdvertisingSA,
  title={Advertising Spending and Market Capitalization},
  author={Amit M. Joshi and Dominique M. Hanssens},
  year={2004}
}

• Amit M. Joshi, Dominique M. Hanssens
• Published 2004
• Business, Economics

Marketing decision makers are increasingly aware of the importance of shareholder value maximization, which calls for an evaluation of the long-run effects of their actions on product-market response as well as investor response. However, the marketing literature to date has focused on the sales or profit response of marketing actions such as advertising spending and new-product development, and the goals of marketing have traditionally been formulated from a customer perspective. There have been no studies of the long-term investor response to marketing actions, in particular the stock price of publicly traded firms. Our research investigates one important aspect of this impact, the long-run relationship between advertising spending and market capitalization. We hypothesize that advertising can have a direct effect on valuation, i.e., an effect over and above its indirect effect via revenue and profit response. Our empirical test is based on 10 years of monthly data for several PC manufacturers. We use multivariate time-series methods that disentangle the long-run effects and short-run effects, as well as the direct and the indirect effects of advertising on firm valuation. The results are categorized as customer response effects (the impact of advertising and R&D expenditures on sales and profits) and investor response effects (the net effect on the value of the firm). The empirical results provide support for our hypothesis that advertising spending has a positive and long-run impact on firms’ market capitalization. Thus, even if productmarket response to the advertising is demonstrably weak, investors are willing to pay a premium for aggressive advertisers. We quantify the magnitude of this investor response effect and discuss its implications for future research.