Understanding the Effect of Advertising on Stock Returns and Firm Value: Theory and Evidence from a Structural Model
Maria Ana Vitorino
University of Minnesota - Carlson School of Management
January 14, 2013
This paper brings structural modeling to the literature on ﬁnancial research in marketing. I estimate 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 simultaneously match the pattern of average stock returns and ﬁrm values of portfolios sorted on advertising expenditures which standard asset pricing models cannot. The estimation results also show that brand equity accounts for a substantial fraction of ﬁrm market value (about 23%). Implications of the ﬁndings for research at the intersection of marketing and ﬁnance are discussed.
Number of Pages in PDF File: 56
Keywords: advertising, brand value, stock returns, structural model, marketing and finance
JEL Classification: D92, E22, G12, G14, G32, M31, M37
Date posted: August 31, 2011 ; Last revised: January 14, 2013
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