Effect of analysts’ earnings pressure on marketing spending and stock market performance

Abstract

Despite the clearly visible effects in the popular press of analysts' pressures on C-level executives, there is limited evidence on their effects on marketing spending decisions. This study asks two questions. First, how do analysts' pressures affect firms' short-term marketing spending decisions? Based on a sample of 2,706 firms during 1987-2009 compiled from Institutional Brokers Earning System, COMPUSTAT, and CRSP databases we find firms cut marketing spending. Second, more importantly, we ask if firms which remained more committed in the past to marketing spending under analysts' pressures have higher longer-term stock market performance. We find the stock market performance of firms more committed to marketing spending under past periods of analysts' pressures is higher. The findings are replicated for R&D spending, and robust across measures, controls, and methodologies. Consideration of two industry-based moderators, R&D spending and revenue growth, and one firm-based moderator, whether the firm is among the industry's top four market share or other lower share firms, reveals that the findings are stronger for high R&D and growth industries and lower market share firms. One key implication is that top executives respond to analysts' pressures by cutting marketing spending in the short-term, however, if they can resist these pressures, longer-term stock market performance is higher.

A Challenge to Business Leaders to End Earnings Management

“…It simply reverses in the next period. Currim, Lim, and Zhang (2018) studied firms under FA earnings pressure; those firms were likely to reduce marketing expenses. They also showed that firms that resisted FA pressure and maintained marketing expenditures performed better over the long term.…”

Brand Equity and Firm Sustainable Performance: The Mediating Role of Analysts’ Recommendations

“…In the second step, we regressed dependent variables (i.e., abnormal return, systematic and idiosyncratic risk) against independent variable as specified by Equations (7)- (9). Finally, in the third step, we regressed dependent variables against the independent variable and mediators as specified by Equations (10)- (12). (12) where the Ab it refers to abnormal return, Srisk it refers to systemic risk and Irisk it refers to idiosyncratic risk.…”

“…Finally, in the third step, we regressed dependent variables against the independent variable and mediators as specified by Equations (10)- (12). (12) where the Ab it refers to abnormal return, Srisk it refers to systemic risk and Irisk it refers to idiosyncratic risk.…”

“…Financial analysts are stock specialists, employed by investment banks and brokerage firms. They issue research reports regarding firm products, strategies, management quality and performance forecasts along with their recommendations on stock investments [11,12]. Thus, financial analysts serve as information intermediaries between firms and investors by reducing the information asymmetry [13] and their recommendations aim to increase investors' utilities, because they can obtain information from both public and private channels that are not available for common investors.…”

Corporate Social Responsibility, Brand equity, and Shareholder Value: Theoretical and Conceptual Perspectives.

“…Investors are to a higher intensity leading their consideration that how stocks behave in the stock exchange, which has exercised an extreme strain on firms to transfer profits [33][34][35] . However, the subdivision of marketing should also evolve into the duty for achieving short-run profit objectives [36] has enter to look at the eventual objective as providing maximum value to shareholders [37][38][39][40][41]. In addition, the departments of finance and marketing in a firm will perform consistently to gain the essential objective of enhancing the wealth of shareholder [42], [39].…”