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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

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Date posted: August 31, 2011 ; Last revised: January 14, 2013

Suggested Citation

Vitorino, Maria Ana, Understanding the Effect of Advertising on Stock Returns and Firm Value: Theory and Evidence from a Structural Model (January 14, 2013). Available at SSRN: http://ssrn.com/abstract=1842846 or http://dx.doi.org/10.2139/ssrn.1842846

Contact Information

Maria Ana Vitorino (Contact Author)
University of Minnesota - Carlson School of Management ( email )
3-150 Carlson School of Management
321 - 19th Avenue South
Minneapolis, MN 55455
United States
HOME PAGE: http://www.tc.umn.edu/~vitorino/
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