Leigh McAlister, Raji Srinivasan, & MinChung Kim
Executive Summary
Marketing executives are being urged to “speak in the language of finance” with top management and their finance colleagues to gain support for marketing initiatives. Responding to this call, the authors examine the impact of a firm’s advertising and research-and-development (R&D) programs on the systematic risk of its stock, a key metric for publicly listed firms. The authors propose that a firm’s advertising and R&D expenditures create market-based intangible assets that insulate it from changes in the stock market, thus lowering its systematic risk.
Scaling the firm’s advertising and R&D expenditures by its sales, the authors estimate these expenditures' effects on systematic risk for 644 publicly listed firms for the period between 1979 and 2001. After controlling for factors that accounting and finance researchers have shown to be associated with systematic risk, the authors find that a firm’s advertising and R&D lower its systematic risk. These findings represent novel and useful insights for marketing executives. Given the dual benefits of advertising and R&D for firm value through their effects on both stock returns and systematic risk, firms must be cautious in cutting back advertising and R&D because such actions can have a negative effect not only in lowering performance but also in increasing systematic risk, cost of capital, and discount rate.
The findings may surprise senior management and finance executives, some of whom may view their firm’s advertising programs, and perhaps even R&D programs, as discretionary activities. Furthermore, because advertising and R&D lower the firm’s systematic risk and, by extension, its weighted average cost of capital, should a proportion of the firm’s advertising and R&D expenditure be considered a financial expenditure aimed at lowering its interest burden?
Finally, this article’s findings can guide marketing executives to initiate a dialogue with their finance counterparts. Firms can track their advertising and R&D programs and systematic risk over time to explore their efficacy, which can form the basis of a constructive dialogue between marketing and finance executives. Such ongoing dialogue may be instructive to senior management and finance executives, who typically control firms’ advertising and R&D investments but are skeptical about the returns to these investments.
Biography
Leigh McAlister is H.E. Hartfelder/The Southland Corporation Regents Chair for Effective Business Leadership in the Red McCombs School of Business at the University of Texas at Austin. She received a BA from the University of Oklahoma and an MS and a PhD from Stanford University. Before joining the University of Texas faculty, she was on the faculties of the University of Washington and the Massachusetts Institute of Technology. In her research, she models phenomena of practical interest. She is currently focused on the impact of marketing actions on the value of the firm. Her deep experience in the grocery industry led to the publication of Grocery Revolution: The New Focus on the Consumer (1997, Addison Wesley, with Barbara E. Kahn). While serving as the Executive Director of the Marketing Science Institute, she urged the field to build from its existing knowledge base (Essential Readings in Marketing, 2006, with Ruth N. Bolton and Ross Rizley, Marketing Science Institute) and to refocus on problems of managerial significance (“Unleashing Potential,” 2005, Journal of Marketing, Vol. 69 (October), 16–17). She received the 2003 William F. O’Dell Award for the article published in Journal of Marketing Research in 1998 that made the most significant long-term contribution to marketing theory, methodology, and/or practice.
Raji Srinivasan is an assistant professor in the Red McCombs School of Business at the University of Texas at Austin. Raji received her PhD from Pennsylvania State University and an MBA from the Indian Institute of Management, Ahmedabad. Her research has appeared or is forthcoming in Journal of Marketing, International Journal of Research in Marketing, and Management Science. Raji’s research interests are in the areas of organizational innovation and marketing metrics.
MinChung Kim is a doctoral candidate in Marketing at the University of Texas at Austin. He holds an MA (2003) in Applied Statistics from the University of Michigan and a BBA (2001) in Business Administration from the SungKyunKwan University in Korea. His teaching experience includes two sections of an introductory statistics course to undergraduate students at the University of Michigan. The main focus of his research is econometric modeling of marketing phenomena. His current research focuses on the impact of marketing activities on financial metrics. In particular, his research has shown that advertising spending reduces the systemic risk of the firm, beta, which represents a financial risk to a firm. In another line of research, he has developed a methodology to allocate media budget to advertising outlets using a Bayesian decision theory. This research presents a new framework for the optimal media budget allocation, resulting in savings in a company’s advertising budget. He received the David Bruton Jr. fellowship (2006) and the preemptive fellowship (2003) at the University of Texas at Austin (2003), as well as the SungKyun full scholarship (1999).
Journal of Marketing, Vol. 71, No. 1, January 2007
View Table of Contents