Essays on advertising's impact on firm risk, firm value, and analysts' forecasts
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Marketing managers are often challenged to show, in the language of finance, that marketing expenditures enhance financial performances. Responding to this call, the first essay examines the impact of a firm's advertising and research and development (R&D) on the systematic risk of its stock, a key finance metric for publicly listed firms. Integrating developments in the accounting, finance, and marketing literatures, we propose that both a firm's advertising and R&D will create market-based assets that will insulate the firm from changes in the stock market, thereby lowering its systematic risk. After controlling for factors that accounting and finance researchers have shown to be associated with the systematic risk, we find that a firm's advertising and R&D lower its systematic risk. For theory, the findings extend prior research that has focused on the effect of marketing initiatives on performance metrics without consideration of the impact of those initiatives on the firm's systematic risk. For practice, the ability of advertising and R&D to reduce systematic risk highlights the multi-faceted financial implications of marketing programs. This study's findings may also surprise senior management and finance executives who are skeptical of the financial accountability of marketing programs. In the second essay, we extend the existing literature to identify a fundamental signal from advertising (S[subscript ADV]) which the stock market and financial analysts might recognize as value-relevant information. We find that increases in the proposed advertising signal increase the cumulative abnormal stock returns (CAR) after controlling for the accounting and finance variables known to affect CAR. However, surprisingly, we find that the value-relevant advertising signal (S[subscript ADV]) is not related to financial analysts' expectation of firm value and their earnings forecasts, and that S[subscript ADV] increases the errors in analysts' earnings forecasts. We thus provide empirical evidence that analysts under-react to the fundamental advertising signal, S[subscript ADV], despite the fact that the measure is impounded in firms' stock prices. With the findings, this study joins a growing literature that demonstrates a link between marketing and financial value of a firm, and furthermore encourages finance professionals' better understanding of marketing accountability.