Isolating the value-relevant part of advertising spending

Purpose This paper aims to examine how much importance the financial market attaches to advertising spending’s short-term productivity vis-à-vis its investment component and the impact of important contextual factors (investor mix and analyst coverage) on this trade-off. Design/methodology/approach A stochastic frontier estimation (SFE) approach is used to help disentangle advertising spending. Using a panel internal instruments model and 10,017 firm-year observations from publicly listed US companies over a 13-year period, this study relates aggregated advertising spending and disentangled advertising spending, together with important contextual factors, to Tobin’s q. Findings The results do not indicate an effect of aggregated advertising spending on Tobin’s q. However, after advertising spending is disentangled, results show the component with an efficient immediate revenue response to have a positive effect on Tobin’s q, whereas the effect of the remaining investment component is negative. Contextual factors moderate investors’ valuation of the components. Research limitations/implications Findings are limited to US publicly listed firms, and are based on secondary, non-experimental data. The results imply that investors reward firms only for short-term advertising productivity, casting doubt on investors’ understanding of the long-term value of marketing. Practical implications The results confirm managers’ belief that not all money spent on advertising creates shareholder value. Managers should use the outlined SFE to benchmark their firms’ short-term advertising productivity against that of industry peer firms. Originality/value This study advances a new perspective, suggesting that advertising spending can be decomposed into two distinct parts by considering how financial market investors evaluate advertising spending. Important contextual effects on this evaluation from firms’ investor mix and analyst coverage are also shown for the first time. The findings help in reconciling conflicting prior results, and shed new light on how the financial market evaluates marketing expenditures.