The role of market-based assets in reducing corporate risk

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Date

2004

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Merino, Maria Cruz

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Abstract

Traditional marketing metrics have excessively focused on assessing marketing activities from a short-term perspective. While research on marketing metrics that might capture the long-run impact of marketing investments on financial performance is at best limited, research focusing on the impact of marketing activities on corporate risk is almost non-existent. This dissertation examines the impact that market-based assets (e.g. brands and channel relationships) and marketing activities that lead to the development of market-based assets (e.g., advertising) may have on enhanced financial performance, reducing risk and managing uncertainty and, ultimately, on enhancing shareholder value. Drawing on research on market-based assets and risk management from finance and strategic management literatures, I argue that market-based assets allow the firm to have more reliable performance, even under uncertain environments. In particular, the first set of hypotheses proposes that strong brands generate enhanced customer preference that secures future earning streams. The second set of hypotheses argue that brand assets represent a shield for their companies allowing them to protect when facing uncertain market conditions. I tested these ideas in the context of a cross-industry panel of U.S. large companies. The findings of this research provide strong support for the proposed link between marketing assets (specifically those created by advertising investments) and the reduction of corporate risk. Consistent with the idea that marketing-related assets can generate more stable income, I found that cash-flows are less volatile when investments in advertising are increased. Empirical results confirm the positive relationships between advertising investments and firm’s market-to-book ratio, suggesting that financial markets associate brand-building activities with enhanced growth opportunities. Moreover, this impact is even stronger when the firm is operating in highly unpredictable environments. These findings suggest that firms with strong brand assets are better prepared to outperform their competitors when market conditions are uncertain. Hence, investments in marketing can enable their firms to be less vulnerable to external conditions.

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