CEOs, faced with increasing competition and pressure to meet quarterly earnings goals, often slash marketing budgets first when looking for ways to reduce spending. As a result, marketers must be able to show how spending on marketing, especially on advertising, helps their firms financially. Until now, however, research attempting to link advertising with firm value has been based on biased samples of firms, precluding a clear assessment of this key relationship.
For marketers, the link between advertising and firm value is often hard to see, making marketing budgets easy targets when executives are under pressure to reduce costs.
Researchers, too, have struggled to establish a link between ad expenditure and firm value. Past studies have attempted to see if advertising improves corporate value or if it only leads to short-term boosts in sales. Findings are not generally consistent, in part because they are based on biased samples of firms, say McCombs Marketing Professors Leigh McAlister and Raji Srinivasan.
That prompted McAlister and Srinivasan to approach the question from a different angle: Does a company’s competitive strategy — that is, whether it’s a differentiator or cost leader — play a role in the effectiveness of its advertising strategy?
They examined nearly 15,000 companies between 1996 and 2009 and attempted to determine each firm’s competitive strategy, a task made easier by an earlier SEC regulation that changed how public firms account for advertising expenses. Prior to 1994, all public firms were required to report ad expenditures in excess of 1 percent of sales. After the new regulation took effect, companies were required to disclose those expenses only if they were deemed to be “material” or important to how the firm operates, regardless of the amount.
For differentiators, advertising represents a necessary investment, and disclosing those costs is a signal to shareholders that the firm’s tactics support its strategy. Firms that compete on price, however, are less likely to share that information with their stockholders — who are keen to see costs kept in check — if they don’t have to.
“What we’re really saying is that advertising plays a different role for different strategies,” says Srinivasan, “and this isn’t something that’s been studied before.”
To find out what that role is, the researchers began by tracking which companies chose to disclose their ad spend and which did not. They then compared each company’s share of voice to its sales and firm value. In other words, what percentage of an entire sector’s or industry’s advertising space is taken up by one specific company, and how does that relate to the company’s total sales or market capitalization?
They find that advertising can help all companies — whether differentiators or cost leaders – increase current sales by providing consumers with product or brand information. But only differentiators benefit from advertising’s ability to persuade shoppers to buy products in the future, the hallmark of customer loyalty, which improves firm value over time.
McAlister and Srinivasan’s research shows empirically that, among differentiators, advertising is an investment that creates value for shareholders. For those firms, Srinivasan emphasizes, “marketing in general, and differentiation in particular, is a key source of advantage.”
What’s more, their findings are especially relevant for accountants. For firms that draw a competitive advantage from differentiation, the researchers write that moving advertising from an income statement expense to a balance sheet asset “would better represent a firm’s asset base. Such a move would reinforce C-suite executives’ view of advertising as the creator of intangible value that can be cut back only if the firm is willing to accept negative effects on its shareholder value.”
Advertising Effectiveness: The Moderating Effect of Firm Strategy appeared in the Journal of Marketing Research in 2016. It was co-authored by Niket Jindal at Indiana University and Albert Cannella from Texas A&M University.