Advertising, Research and Development, and Systematic Risk of the Firm

Abstract

Marketing executives are being urged to speak in the language of finance to gain internal support for marketing initiatives. Responding to this call, the authors examine the impact of a firm's advertising and its research and development (R&D) on the systematic risk of its stock, a key metric for publicly listed firms. They hypothesize that a firm's advertising and R&D expenditures create intangible assets that insulate it from stock market changes, lowering its systematic risk. They test the hypotheses using a panel data on 644 publicly listed firms between 1979 and 2001, consisting of five-year moving windows. They scale the firm's advertising and R&D expenditures by its sales. After controlling for factors that accounting and finance researchers have shown to be associated with systematic risk, the authors find that advertising/sales and R&D/sales lower a firm's systematic risk. The article's findings extend prior research that has focused primarily on the effect of marketing initiatives on performance metrics without consideration of systematic risk. For practice, the ability of advertising and R&D to reduce systematic risk highlights the multifaceted implications of advertising and research programs. The article's findings may surprise senior management, some of whom are skeptical of the financial accountability of advertising programs.

Strategic marketing ambidexterity: antecedents and financial consequences

“…Changes in the value of SMA over time indicate changes in the strategic emphasis and orientation of a firm (Ittner et al 1997). Based on previous research (McAlister et al 2007), we operationalized a firm's maturity as its age in years, which was calculated as the number of years since IPO. For example, if the year was 2005 and the firm had its IPO in 2000, the firm's maturity (age) would be five.…”

“…In this way, exploitation activities serve to create stronger competitive positions in the current market context (e.g., Han et al 2001). Research notes that firms' marketing-based exploitation activities largely involve advertising/promotions strategies (e.g., McAlister et al 2007;Mizik and Jacobson 2003;Reinartz et al 2005). Advertising is an exploitationbased practice focused on creating and facilitating exchange with a firm's current market, and thus on extracting value (Mizik and Jacobson 2003).…”

Marketing and business performance

“…Clearly, access to needed financial resources is important in determining a firm's ability to successfully engage in marketing activities. This is supported by research linking the deployment of financial resources on marketing-related activities such as advertising and firm performance (e.g., McAlister et al 2007;Mizik and Jacobson 2007).…”

Sales margin and margin capitalization rates: linking marketing activities to shareholder value

“…Rao and Bharadwaj (2008) demonstrate theoretically and empirically that a firm's marketing actions can positively influence stock prices but also reduce the firm's cash needs. McAlister et al (2007) find that a firm's advertising and R&D can positively influence a firm's financial performance but also can lower the systematic risk of the firm and, hence, the firm's cost of capital.…”