Ramesh K.S. Rao & Neeraj Bharadwaj
Executive Summary
When marketers do their job well, it results in the sale of their firm’s offerings to new and existing customers. Although this is widely accepted, how the revenues generated by their customers’ purchases translate into shareholders wealth is not fully understood. With growing awareness of this knowledge gap, there is increasing recognition that the field must become more financially accountable, meaning that marketers must be able to articulate how their initiatives contribute to maximizing the wealth of the firm’s owners.
The authors adapt the theory of firm valuation from finance to identify the variables that collectively determine how marketing initiatives affect the shareholders’ wealth. They show that the impact of a marketing action on shareholders’ wealth is the sum of two wealth effects: a “stock price effect” and a “released working capital effect.” The former is the increase in shareholders’ wealth (net present value) that is implicit in the stock price. The latter stems from the possibility that a marketing activity can potentially reduce the firm’s working capital (cash) needs. When this happens, the firm can return any freed up working capital to the shareholders, who can then reinvest it outside the stock markets (e.g., in private equity, real estate, or even in art) to create additional wealth.
The authors also show that the firm’s ability to operate with less cash boosts the firm’s productivity (operating efficiency). Thus, even when marketing does not add to firm value through the stock price effect, it can still benefit the firm by increasing productivity. Because maximizing productivity is a sine qua non for survival in a competitive economy, the authors argue that by helping the company get the maximum “bang for the buck,” marketers can increase the firm’s economic viability.
Biography
Ramesh K.S. Rao is McDermott Centennial Professor of Banking and Finance in the McCombs School of Business at the University of Texas at Austin. He has published in The American Economic Review, Journal of Financial Economics, Management Science, and Journal of Financial and Quantitative Analysis, among others. His books include Financial Management: Concepts and Applications (3d ed.) and A Theory of the Firm’s Cost of Capital (with E. Stevens, 2007). Dr. Rao has had extensive consulting experience. His clients include the Federal Home Loan Banks, Intel Corporation, Burlington Northern, Deutsche Bank, and Fidelity Investments. He has served on the boards of directors of companies and has testified as an expert witness in the Federal Bankruptcy Courts. He was appointed the sole valuation expert in the spin-off restructuring of First City Bancorporation. His current research includes topics in informational asymmetry, valuation, cost of capital, and the intersection of finance with other business disciplines.
Neeraj Bharadwaj is Visiting Assistant Professor of Marketing at University of Chicago’s Graduate School of Business. He has served on the faculty at the University of Texas at Austin and Babson College. Before earning his PhD from the University of Wisconsin at Madison, he worked in product and price management at Miller Brewing Company. Dr. Bharadwaj’s prior research, which focused primarily on business-to-business marketing, has been published in Journal of Retailing, Journal of Business Research, and Industrial Marketing Management. His current research, which falls under the rubric of marketing strategy, investigates such topics as the effect of marketing expenditures on firm value creation, the interplay of goods and services in the sale of holistic value propositions, and outsourcing/offshoring.
Journal of Marketing, Vol. 72, No. 1, January 2008
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