An inquiry into factors affecting marketing resource allocations in firms

Abstract

The first essay of this dissertation investigates how overconfident CEOs moderate the relationship between (i) available firm resources and strategic emphasis and (ii) operating performance and strategic emphasis. Prior literature has evinced that overconfident CEOs undertake risky investment decisions, in anticipation of greater expected returns. However, investments in R&D and advertising, while being risky in nature have different risk levels associated with them, with investments in R&D being riskier than investments in advertising. Consequently, we anticipate that overconfident CEOs are likely to undertake the riskier marketing investment of the two in anticipation of greater returns, when they have access to available internal resources and under conditions of poor operating performance. This study uses the options exercise measure of CEO overconfidence as per prior literature. The findings from this study indicate that overconfident CEOs moderate the relationship between available resources and the value creation process (through increase in R&D investments). Further findings from this study indicate that overconfident CEOs moderate the relationship between firm leverage and the strategic emphasis towards value creation relative to value appropriation (as indicated by increase in R&D investments relative to advertising). This essay contributes to the growing literature in marketing by indicating that managerial personality biases play a key role in determining the firms’ strategic emphasis.

As inside-debt compensation is payable in the future and is sensitive to incidents of bankruptcy, CEOs are motivated to undertake less risky investments so that they have the incentive to protect the value of their inside-debt holdings. As advertising investments are less risky than R&D investments, the analyses in this essay focus on whether increasing the CEOs’ inside-leverage ratio (i.e. ratio of CEO inside-debt to CEO equity), relative to the firms’ leverage ratio (i) motivate CEOs to undertake the value appropriation process (through increased investments in advertising) and (ii) impact the firms’ strategic emphasis. The findings from this study indicate that increases in the CEOs’ inside-leverage ratio relative to the firms’ leverage ratio motivate CEOs to strategically emphasize resources towards the value appropriation process relative to the value creation process (through increased investments in advertising relative to R&D). The findings contribute to the marketing literature by indicating that the structure of CEO compensation plays a key role in determining the firms’ strategic emphasis.

The second essay in the dissertation examines the relationship between the compensation structure of CEOs and the firms’ strategic emphasis. Prior literature has investigated the role of equity compensation in motivating CEOs to undertake risky R&D and advertising investments, in an attempt to mitigate agency conflicts between CEOs and shareholders. However, too much risk-taking by CEOs could negatively affect the firm, particularly when the firm is high leveraged, thereby leading to risk being transferred from shareholders to debt-holders, and subsequently increasing agency cost of debt. In order to lower agency costs of debt as well as reduce the probability of default for the firm, the prior literature has demonstrated that increasing the proportion of inside-debt holdings (i.e. pension and deferred compensation) to equity holdings is an ideal solution.

The purpose of this dissertation is to investigate some of the factors that impact marketing resource allocation in firms. Two key process are responsible for shaping a firm’s marketing strategy namely, value creation through investments in R&D and value appropriation through investments in advertising. As the firm is subjected to financial constraints, managers need to strategically allocate resources between the two investments. This strategic allocation of resources between investments in advertising and R&D is termed as strategic emphasis. Literature until now has investigated the impact of firm factors and industry factors on the firms’ strategic emphasis. However, research has yet to investigate the impact of managerial factors on the firms’ strategic emphasis.