Two essays on corporate advertising expenditures

Abstract

My dissertation consists of two essays and uses marketing and financial data to examine enduring concerns specific to the antecedents, implications, and overall relevance of firm-level advertising expenditures. The first essay examines whether the geographic centrality (the spatial concentration of people and firms in large metropolitan areas) can contribute to the explaining of heterogeneity in advertising spending decisions. I find that advertising intensity is greater for centrally located firms. The results also show that for consumer firms, word-of-mouth (WOM) activity negatively moderates the relationship between geographic centrality and advertising intensity. Firm-level advertising intensity is also shown to decrease (increase) as distance to these central locations increases (decreases). This investigation takes a novel approach to explaining firm-level advertising intensity and in doing so establishes empirical support for the relevance of geographic location to the firm’s advertising decisions. It also adds to the limited location-based considerations in marketing for the relationship between location and firm-level advertising competition and provides geographic context to prior conclusions about the relationship between WOM and advertising demand.

In my second study, I examine whether firms adjust advertising expenditures around accounting based brand scandal events such as financial reporting fraud. Our analysis is guided by opposing propositions presented in the brand scandal and marketing-finance literatures regarding firm response to adverse events (i.e. brand scandals). While, recent findings from the marketing-finance literature show that managers tend to reduce advertising when anticipating the release of negative information, this response is contrary to the established support and recommendation from the extant brand scandal literature. This inconsistency suggests that firms treat product-based brand scandal events different from accounting-based brand scandal events—suggesting that managers anticipate investors’ response to advertising around brand scandal to be different from that of a consumer. In my analysis, I use a sample of firms which have committed financial reporting fraud between 1977 and 2010 to examine advertising spending strategy around fraudulent restatement announcements and the implications of this spending for firm value. The results of this analysis indicate that on average, compared to all other years, annual advertising expenditures are significantly reduced in the year a fraudulent restatement is announced. Additionally, I find that as a result the effect of advertising in the year before, during, and after the restatement announcement is shown to be insignificant. Overall, I document the relevance of advertising expenditures to firm’s reputation management strategies around financial reporting fraud announcements.