Understanding the effect of advertising on stock returns and firm value: Theory and evidence from a structural model

Maria Ana Vitorino

Research output: Contribution to journalArticlepeer-review

17 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)227-245
Number of pages19
JournalManagement Science
Volume60
Issue number1
DOIs
StatePublished - Jan 2014

Keywords

  • Advertising
  • Brand value
  • Marketing and finance
  • Stock returns
  • Structural model

Fingerprint Dive into the research topics of 'Understanding the effect of advertising on stock returns and firm value: Theory and evidence from a structural model'. Together they form a unique fingerprint.

Cite this