Economic policy uncertainty nexus with the value relevance of advertising: Evidence from an emerging market

Abstract

This paper aims to document the effect of economic policy uncertainty on the value of advertising expenditures within the context of an emerging market. The paper shows that the value of advertising expenditures is an increasing function of economic policy uncertainty. The impact of advertising on firm performance is more pronounced during the periods characterized by higher economic policy uncertainty. We argue that, during uncertain times, the financial information loses its relevance. Therefore, during these periods, non‐financial traits, such as brand image, customer equity, relationship capital, and familiarity that characterizes firms with high advertising become more important. The findings hold in various sub‐samples and across various proxies of advertising activity. The findings also hold under alternate estimation procedures (pooled OLS regression, panel data with fixed effects and instrument variable regression). More importantly, this paper also shows that, relative to other agency reducing mechanisms (such as analyst coverage, asset utilization ratio, expense ratio and dividend payments), advertising is more valuable during periods with high economic policy uncertainty.

The nexus between economic policy uncertainty and access to finance: a study of developing countries

“…These unexpected changes expose firms to higher risks and can lead to excessive volatility of future cash flows generated by firms (Ahsan and Qureshi, 2021;Iqbal et al, 2020). Unfortunately, such uncertainty is beyond the control of firms, thereby making it difficult for them to hedge against these shocks (Ahsan et al, 2022;Jabbouri et al, 2023b). Consequently, an increase in economic uncertainty reduces the real value of a firm's assets.…”

“…Unfortunately, such uncertainty is beyond the control of firms, thereby making it difficult for them to hedge against these shocks (Ahsan et al. , 2022; Jabbouri et al ., 2023b). Consequently, an increase in economic uncertainty reduces the real value of a firm's assets.…”