Investor Sentiment, Product Features, and Advertising Investment Sensitivities

Abstract

Investor sentiment plays an important role, affecting firm level advertising expenditures. We provide evidence that financially constrained firms exhibit lower advertising investment-cash flow sensitivity and higher advertising investment-q sensitivity during high sentiment periods. The patterns are driven mainly by those firms facing financial constraints. More importantly, we identify several product features that also affect advertising investment sensitivities. Sorting on product features generates investment sensitivities that closely resemble those of sorting on financial constraint measures. We design empirical analyses to provide clean tests of the cost-ofexternal-financing-based and product-feature-based explanations underlying the variation in advertising investment sensitivities.

The Firm Value and Marketing Intensity Decision in Conditions of Financial Constraint: A Comparative Study of the United States and Latin America

“…In addition, local firms experiencing financial constraints reduce commercial product innovations (Gorodnichenko and Schnitzer 2013), which is related to the product-in-marketing strategy. Luo, Jiang, and Cai (2015) found a negative relationship between financially constrained firms and advertising–cash flow sensitivity during investors’ high-sentiment periods. Finally, other evidence shows that financial constraints negatively affect exports in SMEs (Jinjarak and Wignaraja 2016) and intangible investments that include marketing intensity (Mishra and Ewing 2020).…”

“…Although the references do not exhibit a direct relation between financial constraints and marketing intensity, they are related in some way to marketing intensity efforts. In this situation, there exists a negative impact on advertisement spending (Fee, Hadlock, and Pierce 2009), product innovation (Gorodnichenko and Schnitzer 2013), advertising–cash flow sensitivity (Luo, Jiang, and Cai 2015, small and medium enterprise (SME) exports (Jinjarak and Wignaraja 2016), and intangible investments (Mishra and Ewing 2020).…”

Investor sentiment and advertising expenditure

“…The affordability argument would, therefore, suggest that periods of high sentiment are associated with higher expenditure on advertising. The converse would be true for low sentiment periods, when firms are short of funds and are forced to curtail their advertising budgets (Joseph & Richardson, 2002;Luo et al, 2014;Tellis, 1998).…”

“…They systematically underestimate the expected cash flows and/or overestimate risk, causing an undervaluation of stocks. This undervaluation and investors' heightened aversion to risk make it difficult for managers to obtain new funds from investors (Luo, Jiang, & Cai, 2014). This is especially true for financially constrained firms-that is, firms that have low or negative internal cash flows and face substantial uncertainty about their future prospectswhose access to external finances may dry up dramatically during low sentiment periods.…”

Advertising investment under switching costs

“…Interestingly, Luo et al (2014) found that durable goods rely less on advertising than non-durable goods. In general, durable goods face higher switching costs than non-durable goods.…”