Understanding the Effect of Advertising on Stock Returns and Firm Value: Theory and Evidence from a Structural Model

Maria Ana Vitorino ()
Additional contact information
Maria Ana Vitorino: Carlson School of Management, University of Minnesota, Minneapolis, Minnesota 55455

Management Science, 2014, vol. 60, issue 1, 227-245

Abstract: This paper brings structural modeling to the literature on financial research in marketing. I propose a dynamic investment-based model to understand the impact of advertising expenditures on stock returns and firm value. In addition, by interpreting advertising expenditures as an investment in brand capital, the approach in this paper provides a novel way to measure brand equity grounded in economic theory. Using the Euler equations from the firm's maximization problem, I derive closed-form expressions for the firm's equilibrium stock returns and market value, which depend on observable firm characteristics. I test the model's predictions by the generalized method of moments and data from a large cross section of publicly traded firms. The model is able to match simultaneously the pattern of average stock returns and firm values of portfolios sorted on advertising expenditures that standard asset pricing models cannot. The estimation results also show that brand equity accounts for a substantial fraction of firm market value (about 23%), and that this value varies substantially across industries. Implications of the findings for research at the intersection of marketing and finance are discussed. This paper was accepted by Wei Xiong, finance.

Keywords: advertising; brand value; stock returns; structural model; marketing and finance (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.2013.1748 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:60:y:2014:i:1:p:227-245

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().