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Advertising, R&D Expenditures and the Market Value of the Firm
Author(s): Keith W. Chauvin and Mark HirscheySource: Financial Management, Vol. 22, No. 4 (Winter, 1993), pp. 128-140Published by: Blackwell Publishing on behalf of the Financial Management Association InternationalStable URL: http://www.jstor.org/stable/3665583 .
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Advertising,& D Expendituresn d
t h e M a r k e t V a l u e o f t h e F i r m
KeithW.Chauvin nd MarkHirschey
Keith W.Chauvin s AssistantProfessor of Businessand MarkHirschey s Professor ofBusiness,bothat the Universityof Kansas, Lawrence,Kansas.
N This paper providesevidence that advertisingand re-
search anddevelopment R&D)expenditureshave large,
positive and consistent nfluences on the marketvalue of
the firm. Like informationon currentcashflows, data on
advertisingand R&D spending appearto help investors
form appropriate xpectations concerning the size and
variabilityof future cash flows. As a result,spendingon
advertisingandR&D can be viewed as a form of invest-
mentin intangibleassets withpredictablypositive effects
on futurecash flows.While the significantmarketvalue effects of advertis-
ingandR&Daregenerallyapparentor all COMPUSTAT
firms,suchaggregate videncehasthepotential o obscure
meaningfuldifferencesacrossfirm size classesand ndus-
trygroups.Consistentwith thefact thatonly a handfulof
firmsareresponsible or substantial dvertisingandR&D
spending, he valuation ffects of advertising ndR&D are
most uniformlyevident in the case of largefirms.Infact,thevaluationeffects of advertising nd R&D aretypically
greaterfor larger as opposed to smaller firms in both
manufacturingndnonmanufacturingectors.These find-
ings suggest that size advantagesmake advertisingand
R&Drelativelymoreprofitableorlarger irms.Neverthe-
less, smaller firms do not appearto be precludedfrom
making profitableinvestments n advertisingand R&D.
Some evidence emergesto suggestthat the well-targetedadvertisingand R&D efforts of the smallestfirmsin the
economycan be highly profitable.
I.InvestmentAspects of Advertisingand R&DExpenditures
An emerging body of research considersthe market
value effects of a wide range of corporate nvestment
decisions. McConnelland Muscarella[15], for example,find thatunanticipatedncreases nplannedcapitalexpen-
We thank formereditor James S. Ang, threeanonymousreferees,and
seminar participantsat the University of Kansas for several helpfulcommentson anearlierdraft.Ofcourse,anyerrors hatremainaresolelyourresponsibility.
128
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CHAUVIN& HIRSCHEYADVERTISING,&DEXPENDITURES 129
ditures have a positive effect on the marketvalue of thefirm and that unanticipateddecreases have a negative
impact.Statmanand Sepe [20] reporta correspondingly
positivemarketreaction to the termination f investment
projects hathavepoorprospects,while BrickleyandVan
Drunen[4] find anegativereaction o operatingunit iqui-dations. Blackwell, Marr,and Spivey [2] find a signifi-
cantly negativestockmarketreaction o plant-closingan-
nouncements.
Chan, Martin, and Kensinger [5] and Doukas and
Switzer[7]reportnteresting videnceonthe stockmarket
reaction to a very specific type of corporate nvestment
decision: announcementsof increased R&D spending.Chan,Martin,andKensinger 5] and DoukasandSwitzer
[7] find statisticallysignificantR&D announcementdayreturns,especially in the case of large"high-tech"ndus-
trial firms that devote substantial esources o R&D. The
positive share-pricereaction to announcements of in-creasedR&D spendingdiscovered n thesestudiescanbe
takenas evidence of a strong inkbetweenR&Dspendingand the marketvalueof the firm,a link that is especiallyrobust n the case of largefirms.
To furthernvestigate hisrelation,ourpaperconsiders
the cross-sectional influences of both advertisingand
R&D expenditureson the marketvalueof the firm. This
paperconsidershow thetraditionally ecognizedvaluation
effects of current ashflow,growth,risk and market hareare augmentedwhen both advertisingandR&D are con-
sideredaspotentially mportantourcesof intangible api-tal. To the extent thatadvertisingand R&D expenditures
representa type of investmentexpenditure hatgives rise
to economic benefitslastingmorethan one year,a market
value influencecan be anticipated.Ofcourse,current ash
flows may also reflect,atleast in part, hepositive effects
of previous nvestmentsn advertising ndR&D.Oncethe
valuation effects attributable o current cash flows are
controlled,any incrementalvaluation effects of current
advertisingand
R&D expenditures epresentevidence ofintangiblecapitalor asset-like influences.1
Thispaperbuilds on relatedresearchby Hirschey[10],
Jose, Nichols, and Stevens [12], Lustgarten and
Thomadakis 14], Merck,Shleifer,and Vishny[17], andMorck and Yeung [18]. Each of these studies reportspositive marketvalue effects of advertisingand R&D
expendituresthat are consistentwith a forward-lookingperspectiveof stockmarketnvestors.Unfortunately,achof these studies s restrictedbydataconsiderations o fairlylimitedsamplesof largefirms.Data is now availablethat
makes a much morecompleteanalysispossible,includingconsiderationof the differences in the effectiveness of
advertisingandR&D acrossfirmsize classes andbetween
manufacturingndnonmanufacturingndustrygroups.
II.EconomicCharacteristicsofAdvertisingand R&D
A.Advertisingnd R&D pendingbyIndustryGroup
Exhibit 1 shows the distributionof advertisingandR&D expendituresby COMPUSTATirmsorganizedac-
cording o broad wo-digit ndustry roups.2Thesedataarefirmaveragesoverthe 1988-1990 period.Thepurposeof
Exhibit1 is to illustrate hat he distribution f advertisingand R&D is fairlyskewed.The distribution f advertising
intensityandR&Dintensityacrossall industriess clearlynot uniform.While bothadvertisingandR&D areimport-antmethodsof
intangible apital nvestment,t is
relativelyrare o find firmsand ndustries hatemploybothmethods
in tandem.
Advertisingexpendituresandadvertisingntensityare
especially high among toy companies included in
COMPUSTAT'smiscellaneous manufacturing ndustry(such as TonkaCorp., Mattel, Inc., and Hasbro, Inc.),motionpicturecompanies,andfirmsthatprovideamuse-mentandrecreationproducts.Advertisingntensity s also
high among irmsproviding ducational ervices,food andkindredproducts, obacco,andleatherproducts.Little,if
any,advertisings notedforfirms nheavymanufacturing
'HirscheyandWeygandt 11] show that f economic amortization f the
exponentialdecay type can be assumed,alongwith constantpercentageratesof growth n advertising ndR&Dexpenditures,hen hemagnitudeof intangiblecapitalequalsannualexpenditures n advertisingor R&D
multipliedby a constant.Given theseassumptions,hestockof intangible
advertisingand R&Dcapital s strictlyproportionalo theflow of adver-
tising andR&D expenditures,andthe valuationeffects of each type of
expenditure anbe taken asindicativeof intangiblecapital nfluences.
2COMPUSTATnnualdata temsare aken rom hefullcoverageversion
of COMPUSTAT CPlus forthe 1988-1990 period.Theoverallsampleis limitedto those firmshavingnonegativebook values and at least$100million in marketcapitalization sharepricetimes the numberof shares
outstanding,price-adjusted o December31, 1990). The marketvaluescreen is used to avoid marketvalueestimationproblemsfor firmsthat
are nactively raded n thinmarkets.TheCOMPUSTATirmsstudied n
thispaper nclude hoseresponsible or anaggregate verage$58.9billionin advertising expendituresper year, or 77.5% of the $75.9 billion
aggregateaverage or allCOMPUSTATirmsover he 1988-1990period.Firmsincludedareresponsible or an aggregateaverage$92.2 billion inR&D expendituresper year, or 78.8% of the $117 billion aggregateaverage or all COMPUSTATirms over the 1988-1990 period.
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130 FINANCIAL ANAGEMENTWINTER993
Exhibit 1. The Distributionof AdvertisingandR&D Spendingfor COMPUSTAT irmsOrganizedby Two-DigitSICCode IndustryGroups,FirmAverages or 1988-1990 (DollarAmounts n Millions)
Two-DigitNumber Sales
AdvertisingAD/S Per
IndustryR&D R&D/SPer
SIC of Industry Per Industry Per Firm R&D Per FirmGroup IndustryGroup Firms Sales Firm Advertising Firm (Weighted) Spending Firm (Weighted)
I Agriculture roduction 4 $3,832.0 $1,045.1 $65.3 $17.8 1.7% $85.1 $23.2 2.2%8 Forestry 2 309.0 154.5 0.0 0.0 0.0% 0.0 0.0 0.0%
10 Metalmining 21 6,441.1 311.7 0.0 0.0 0.0% 1.9 0.1 0.0%12 Coalmining 4 1,823.6 455.9 0.0 0.0 0.0% 0.0 0.0 0.0%13 Oil andgas extraction 49 49,330.4 1,006.7 0.5 0.0 0.0% 457.2 9.3 0.9%14 Miningnonmetallicminerals 5 3,266.2 653.2 0.7 0.1 0.0% 20.3 4.1 0.6%15 Buildingconstruction 13 12,038.1 902.9 46.2 3.5 0.4% 7.6 0.6 0.1%16 Heavyconstruction 6 15,310.3 2,701.8 0.0 0.0 0.0% 106.7 18.8 0.7%17 Constructionspecialtrade) 2 2,372.3 1,186.2 0.0 0.0 0.0% 0.0 0.0 0.0%20 Food andkindredproducts 60 295,824.0 4,957.9 15,059.8 252.4 5.1% 2,511.0 42.1 0.8%21 Tobaccoproducts 5 31,286.3 6,704.2 1,210.1 259.3 3.9% 77.0 16.5 0.2%22 Textilemill products 14 13,727.2 957.7 243.5 17.0 1.8% 24.5 1.7 0.2%23 Appareland other inishedgoods 12 11,050.0 920.8 273.8 22.8 2.5% 6.3 0.5 0.1%24 Lumberand wood products 5 3,206.4 641.3 0.0 0.0 0.0% 2.3 0.5 0.1%25 Furniture ndfixtures 11 9,192.2 861.8 199.0 18.7 2.2% 58.2 5.5 0.6%
26 Paperandalliedproducts 45 124,921.3 2,796.7 521.8 11.7 0.4% 1,479.2 33.1 1.2%27 Printingandpublishing 42 53,616.6 1,276.6 1,244.8 29.6 2.3% 49.4 1.2 0.1%28 Chemicalsand alliedproducts 109 317,434.1 2,921.2 10,393.3 95.6 3.3% 16,180.1 148.9 5.1%29 Petroleum efining 33 496,104.9 15,186.9 120.7 3.7 0.0% 3,227.5 98.8 0.7%30 Rubberandplastic products 23 33,553.1 1,438.0 748.6 32.1 2.2% 555.2 23.8 1.7%31 Leatherand eatherproducts 3 2,463.0 821.0 91.0 30.3 3.7% 0.0 0.0 0.0%32 Stone,clay andglass products 11 10,713.5 974.0 86.0 7.8 0.8% 142.0 12.9 1.3%33 Primarymetals 36 75,557.4 2,079.6 0.2 0.0 0.0% 603.7 16.6 0.8%34 Fabricatedmetalproducts 29 27,803.9 958.8 572.1 19.7 2.1% 299.7 10.3 1.1%35 Indust.machinery& computer quip. 115 335,594.6 2,926.7 3,013.0 26.3 0.9% 20,975.7 182.9 6.3%36 Electronic quipment 76 249,503.3 3,282.9 4,592.5 60.4 1.8% 13,141.7 172.9 5.3%37 Transportationquipment 52 516,709.8 9,873.4 5,823.8 111.3 1.1% 18,480.5 353.1 3.6%38 Measuringnstr.,photography,watches 68 134,634.4 1,979.9 2,339.5 34.4 1.7% 7,185.8 105.7 5.3%39 Misc.manufacturingndustries 16 6,546.7 409.2 589.5 36.8 9.0% 142.1 8.9 2.2%40 Railroad ransportation 10 40,523.0 3,921.6 0.0 0.0 0.0% 0.0 0.0 0.0%42 Motor reight ransportation 9 9,391.6 1,083.6 0.0 0.0 0.0% 0.0 0.0 0.0%44 Water ransportation 9 5,915.5 633.8 53.1 5.7 0.9% 0.0 0.0 0.0%
45 Airtransportation 16 59,604.2 3,725.3 1,014.6 63.4 1.7% 0.0 0.0 0.0%46 Pipelines 3 948.0 355.5 0.0 0.0 0.0% 0.0 0.0 0.0%47 Transportationervices 4 3,357.5 839.4 0.0 0.0 0.0% 0.0 0.0 0.0%48 Communications 50 234,292.3 4,717.3 2,160.2 43.5 0.9% 4,306.8 86.7 1.8%49 Electric,gas, sanitary ervices 174 263,269.6 1,510.2 0.2 0.0 0.0% 3.0 0.0 0.0%50 Wholesaledurablegoods 33 157,162.4 4,811.1 86.8 2.7 0.1% 36.4 1.1 0.0%51 Wholesalenondurable oods 27 105,983.8 3,925.3 69.6 2.6 0.1% 5.2 0.2 0.0%52 Buildingmaterials,hardware& garden 6 8,985.1 1,418.7 155.0 24.5 1.7% 0.0 0.0 0.0%53 Generalmerchandise tores 26 153,890.7 5,995.7 2,713.2 105.7 1.8% 0.0 0.0 0.0%54 Food stores 18 73,207.4 4,067.1 561.0 31.2 0.8% 0.8 0.0 0.0%55 Autodealers andgas stations 2 2,088.1 894.9 40.7 17.5 2.0% 0.0 0.0 0.0%56 Apparelandaccessorystores 18 28,507.8 1,583.8 448.2 24.9 1.6% 0.0 0.0 0.0%57 Home furniture ndequipment tores 7 7,684.8 1,047.9 265.2 36.2 3.5% 0.0 0.0 0.0%58 Eatinganddrinkingplaces 24 22,598.6 954.9 808.0 34.1 3.6% 0.0 0.0 0.0%59 Miscellaneousretail 20 22,792.3 1,158.9 421.4 21.4 1.8% 0.8 0.0 0.0%60 Depository nstitutions 16 23,159.8 1,447.5 47.9 3.0 0.2% 0.1 0.0 0.0%61 Nondepository redit nstitutions 16 87,815.3 5,488.5 204.6 12.8 0.2% 653.6 40.9 0.7%62 Securityandcommoditybrokers 18 33,839.1 1,845.8 383.1 20.9 1.1% 16.2 0.9 0.0%63 Insurance arriers 5 3,583.3 767.8 6.8 1.5 0.2% 0.0 0.0 0.0%64 Insurance gentsandbrokers 7 5,305.2 723.4 0.0 0.0 0.0% 10.6 1.4 0.2%65 Real estate 6 1,264.0 210.7 16.5 2.8 1.3% 0.0 0.0 0.0%67 Holdingandother nvestmentoffices 18 1,673.8 94.7 1.1 0.1 0.1% 0.2 0.0 0.0%70 Hotelsandother odgingplaces 4 2,007.6 501.9 69.3 17.3 3.5% 0.0 0.0 0.0%72 Personal ervices 6 5,967.9 994.6 46.9 7.8 0.8% 0.0 0.0 0.0%73 Business services 64 39,019.9 609.7 319.4 5.0 0.8% 1,231.7 19.2 3.2%75 Autorepair, ervices,andgarages 4 5,893.7 1,360.1 65.8 15.2 1.1% 0.0 0.0 0.0%78 Motionpictures 12 10,380.2 889.7 912.1 78.2 8.8% 14.9 1.3 0.1%79 Amusementandrecreation 11 9,197.9 836.2 612.4 55.7 6.7% 8.9 0.8 0.1%80 Health services 20 17,721.6 901.1 82.5 4.2 0.5% 3.6 0.2 0.0%82 Educational ervices 2 676.9 290.1 41.2 17.7 6.1% 18.3 7.9 2.7%87 Engineering, ccounting& otherserv. 14 11,382.6 794.1 14.5 1.0 0.1% 37.5 2.6 0.3%
Totalsample 1,548 $4,303,257.1 $2,076.0 $58,856.9 $27.7 1.6% $92,169.2 $23.1 0.8%
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132 FINANCIAL ANAGEMENTWINTER993
Exhibit 2. TheTop20LeadingCOMPUSTAT irms n Termsof AdvertisingandR&DExpenditures ndAdvertisingand
R&D Intensity,1988-1990 (DollarAmounts n Millions)
TheTop
20Firms
inTermsofAdvertisingExpenditures
Two-Digit Advertising Advertising R&D R&DIntensityRank CompanyName Industry Expenditures Intensity AD/S) Expenditures (R&D/S)
1 UnileverCombined 20 $3,274.7 9.35% $653.0 1.87%
2 PhillipMorrisCompany, nc. 20 2,387.7 6.56% 302.3 0.83%
3 GeneralMotorsCorp. 37 2,014.4 1.63% 5,114.3 4.15%4 Proctor& Gamble Co. 28 1,771.0 8.20% 657.7 3.04%
5 FordMotorCo. 37 1,337.0 1.40% 3,218.3 3.37%
6 FiatSpa(ADR) 37 1,229.0 2.68% 1,718.0 3.74%
7 PhilipsN V 36 1,215.3 4.01% 2,429.8 8.01%
8 BristolMyersSquibb 28 1,177.6 13.88% 688.0 8.11%
9 EastmanKodakCo. 38 1,055.7 5.83% 1,243.0 6.86%
10 Warner-Lambert o. 28 992.2 23.27% 315.8 7.41%
11 Sony Corp. 36 984.7 4.79% 1,196.1 5.82%
12 SaraLee Corp. 20 913.0 8.12% 0.0 0.00%13 AmericanTelephone& Telegraph 48 904.3 1.71% 2,552.3 4.82%
14 Pepsico,Inc. 20 887.8 5.78% 95.0 0.62%
15 Coca-ColaCo. 20 887.5 9.67% 0.0 0.00%
16 RalstonPurinaCo. 20 774.4 11.83% 66.5 1.02%
17 RJRNabiscoHoldings Corp. 21 735.0 4.95% 0.0 0.00%
18 HondaMotorLtd. 37 681.3 2.51% 1,314.4 4.85%
19 ChryslerCorp. 37 673.5 2.02% 914.3 2.74%
20 Gillette Co. 34 667.5 16.35% 91.1 2.23%
Average $1,228.2 7.23% $1,128.5 3.47%
TheTop20 Firms n Termsof Advertising ntensity
Two-Digit Advertising Advertising R&D R&DIntensityRank CompanyName Industry Expenditures Intensity AD/S) Expenditures (R&D/S)
1 A & W Brands,Inc. 20 $36.1 32.67% $0.0 0.00%
2 BlockDrug 28 135.7 30.04% 13.6 3.01%
3 ArmorAll ProductsCorp. 28 39.2 26.22% 0.0 0.00%
4 Warner-Lambert o. 28 992.2 23.27% 315.8 7.41%
5 BlairCorp. 59 105.1 23.02% 0.0 0.00%
6 OrionPicturesCorp. 78 117.9 22.99% 0.0 0.00%
7 NeutrogenaCorp. 28 43.4 21.97% 1.4 0.70%
8 ValueLine, Inc. 62 14.2 21.85% 0.0 0.00%
9 Borland nternational 73 32.8 19.29% 18.8 11.06%
10 Noxell 28 99.2 19.02% 6.4 1.22%
11 Alberto-CulverCo. 28 128.7 18.23% 0.0 0.00%
12 Amre,Inc. 59 33.2 18.07% 0.0 0.00%
13 Playboy Enterprises 27 29.2 17.99% 0.0 0.00%14 Carter-Wallace,nc. 28 98.3 17.30% 43.9 7.73%
15 TonkaCorp. 39 146.7 16.85% 30.1 3.46%
16 TycoToys, Inc. 39 63.3 16.47% 6.0 1.55%
17 GilletteCo. 34 667.5 16.35% 91.1 2.23%
18 HersheyFoodsCorp. 20 389.4 15.99% 17.0 0.70%
19 Mattel,Inc. 39 194.8 15.80% 37.6 3.05%
20 Wrigley(Wm.)Jr.,Co. 20 152.8 15.30% 0.0 0.00%
Average $176.0 20.44% $29.1 2.11%
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CHAUVIN& HIRSCHEYADVERTISING,&DEXPENDITURES 133
Exhibit 2. TheTop20 LeadingCOMPUSTAT irms n Termsof AdvertisingandR&DExpenditures ndAdvertisingand
R&DIntensity,1988-1990 (DollarAmounts n Millions)- Continued
TheTop20 Firmsin TermsofR&DExpenditures
Two-Digit Advertising Advertising R&D R&DIntensityRank CompanyName Industry Expenditures Intensity AD/S) Expenditures (R&D/S)
1 GeneralMotorsCorp. 37 $2,014.4 1.63% $5,114.3 4.15%
2 IBMCorp. 35 0.0 0.00% 4,844.7 7.59%
3 NECCorp. 35 360.7 1.52% 3,873.8 16.32%
4 FordMotorCorp. 37 1,337.0 1.40% 3,218.3 3.37%
5 HitachiLtd. 35 562.4 1.14% 3,009.3 6.09%
6 AmericanTelephone& Telegraph 48 904.3 1.71% 2,552.3 4.82%
7 MatsushitaElectric 36 480.2 1.14% 2,438.2 5.79%
8 PhilipsNV 36 1,215.3 4.01% 2,429.8 8.01%
9 FiatSpa 37 1,229.0 2.68% 1,718.0 3.74%
10 Digital Equipment 35 96.2 0.78% 1,482.0 11.96%
11 Du Pont(E.I.)De Nemours 28 0.0 0.00% 1,378.0 3.84%
12 GeneralElectric Co. 36 471.0 0.88% 1,322.7 2.47%13 HondaMotor 37 681.3 2.51% 1,314.4 4.85%
14 EastmanKodakCo. 38 1,055.7 5.83% 1,243.0 6.86%
15 Hewlett-PackardCo. 35 327.7 2.81% 1,218.3 10.45%
16 Sony Corp. 36 984.7 4.79% 1,196.1 5.82%
17 Volvo Ab. 37 226.3 1.50% 1,028.8 6.83%
18 ImperialChemicalInds. Plc. 28 445.7 1.99% 973.7 4.36%
19 UnitedTechnologiesCorp. 37 0.0 0.00% 970.1 4.91%
20 Dow Chemical 28 516.0 2.86% 927.0 5.14%
Average $645.4 1.96% $2,112.6 6.37%
TheTop20 Firms in Terms f R&DIntensity
Two-Digit Advertising Advertising R&D R&DIntensityRank CompanyName Industry Expenditures Intensity AD/S) Expenditures (R&D/S)
1 ChinronCorp. 28 $0.0 0.00% $38.8 108.86%
2 GeneticsInstitute, nc. 28 0.0 0.00% 29.0 97.70%
3 Biogen, Inc. 28 0.0 0.00% 19.0 92.04%
4 SCIOS,Inc. 28 0.0 0.00% 7.0 56.34%
5 Centocore, nc. 28 4.0 6.26% 33.5 52.35%
6 CetusCorp. 28 1.9 5.43% 13.4 39.03%
7 Synergen,Inc. 28 0.0 0.00% 5.5 46.18%
8 Alza Corp. 28 1.2 1.68% 29.4 39.72%
9 Genentech, nc. 28 28.1 7.38% 138.0 36.28%
10 Continuum, nc. 73 0.0 0.00% 32.8 34.06%
11 ImmunexCorp. 28 0.0 0.00% 6.8 29.40%
12 Nova PharmaceuticalCorp. 28 0.0 0.00% 3.9 25.69%
13 CypressSemiconductorCo. 36 3.0 1.61% 45.6 24.26%14 Evans & SoutherlandComputerCorp. 36 1.2 0.88% 33.5 23.58%
15 ManagementScience America 73 5.2 2.09% 58.9 23.57%
16 Amgen,Inc. 28 2.4 1.10% 43.9 20.50%
17 MacNeal-SchwendlerCorp. 73 0.8 1.60% 10.5 22.19%
18 CadenceDesign Systems,Inc. 73 0.5 0.34% 29.9 20.29%
19 Ashton-TateCo. 73 17.8 6.64% 53.7 20.07%
20 TelematicsInternational,nc. 35 2.0 3.70% 10.8 19.93%
Average $3.4 1.94% $32.2 41.60%
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134 FINANCIAL ANAGEMENTWINTER993
Ill.Methodology and Data
A.Sources of CapitalizedMarketValueOf primaryconcernto this studyis the role played by
advertising ndR&D asdeterminants f the currentmarket
value of the firm.To isolate suchinfluences,theeffects of
other factors thatmightaffectcurrentmarketvalue must
be constrained,including cash flow, growth, risk, and
market hareconsiderations.Current ash flow is takenas
the best available ndicatorof a firm'sabilityto generatecash flows duringfutureperiods.Cash flow is measured
by operating ncome before depreciationminus interest
expense, taxes, preferreddividends and common divi-
dends. MillerandModigliani[16] argue hatgrowthhasa
positive effect on marketvalues if future nvestmentsare
expected to earn above-normalrates of return,and if
growth is an importantdeterminant of these returns.Growth s measuredby the least-squaresestimate of the
three-yearrate of growthin sales for each firm. While
growthaffectsthemagnitude f anticipatedxcessreturns,a valuation influence may also be associated with the
degreeof stabilitysuchreturns xhibit.Risk is measured
in thispaperusingthelogarithm f the ratioof the 52-week
high and low stock price for each firm, an index that is
proportionalo the Garman nd Klass[8]"ideal" olatility
estimator.With an increasein risk, the marketvalue ofexpectedreturnswill fall (Thomadakis 22]). Thomadakis
[22], among others, considers the valuation effects of
marketshare data as a potentially mportantndicatorof
the firm's ability to earn economic rents tied to market
power or superiorefficiency.Marketshareis definedas
total revenue n thefirm'sprimary-productour-digitSIC
industry xpressedas a percentageof industry ales.
B.MeasuringCapitalizedMarketValueAlternative cross-sectional measures of the market
valueof the firm can be employedto learnwhether nves-tors recognize long-termor asset-like characteristicsof
advertisingand R&D expenditures.Among the most fa-
miliarof these are Tobin's"qratio" Brainard ndTobin
[3]),definedas the marketvalueof the firmnormalizedbythe replacement ost of tangibleassets; and Thomadakis'
[22] "relativeexcess valuation" EV/S),measuredas themarket value of common minus the book value of
stockholders'equity, all normalizedby sales. Both areattractivevariantsof the ratioof the marketvalue of the
firm dividedby the book value of tangibleassets studied
by MillerandModigliani[16].
While q and EVIS provide appealing market-basedviews of investor xpectations oncerninghefirm's uture
profit potential,neitheris completely free from the use
and/orabuse of accountingconventions.Bothq andEVISaremarketcumaccounting-basedmeasures hatare sub-
ject to measurementerrors n the valuation of tangibleassets. The q data are subjectto errorto the extent that
flaws persist n accountingreplacement ost data,just as
EV/S s subject o errorgiventhataccountingbookvalues
measure mperfectlyhe economicvalueof tangibleassets.
While it is commonlypresumed hataccountingreplace-ment costs providea measureof tangible assets that is
superior o traditionalbook value data,this is not neces-
sarily rue. ndeed,WattsandZimmerman23]argue, rom
a market-based erspective, hataccountingreplacementcost numbersare irrelevantor securitypricingpurposes.It follows thatreplacement ost adjustmentsobook value
data have thepotential o obscure,rather hanmake more
precise,the level anddeterminants f thecapitalizedvalue
of the firm(Landsman ndMagliolo [13]). In addition o
theirobvious exposureto accountingmeasurement rror,bothq andEV/Saresubject o accountingbias as well. As
Schwert[19]argues, uch measuresare ikelytoreflect,at
least in part, he effects of accountingpolicy decisions.If
firmscapitalizenonproductive ssets so as to smooth or
hide monopoly profits, both q and EVISwill be corre-
spondinglybiased.To provide an unbiased framework or analysis, this
studyconsiders he effectsof advertising ndR&D on the
marketvalue of commonequitywithoutany accounting-based adjustments.Both q and EVIScan be viewed as
accounting-adjustedand size-adjusted valuation mea-
sures,where the replacement alue of tangibleassets and
sales, respectively,are employed for size normalization
purposes.Therefore,hisstudy ocuses onthemarket alue
implicationsof advertisingand R&D in a manner that
minimizes the potential oraccountingerroror bias.
Based on theseconsiderations, generalmodelis sug-
gested:
MarketValue= ao + blCash Flows + b2Growth+ b3Risk
+ b4Market hare+ b5Advertising
+ b6R&D+ e. (1)
Size normalizations accomplished n this studybydefla-
ting (dividing)bothdependentandindependent ariables
for each firm i by total sales revenue raised to the 1.5
power,S1". This methodof size normalizationwas chosen
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CHAUVIN& HIRSCHEYADVERTISING,&DEXPENDITURES 135
on anempiricalbasis; S1.5 s thelog likelihoodratio-min-
imizingdeflator.
C.The DataThisstudy ocuses oncross-sectional amplesof COM-
PUSTAT firms over the three-year period from 1988
through1990,inclusive.Anaverageofroughly1,500firms
per year are considered.Firm-levelrather hanindustry-level data areanalyzedto ensurean exact matchbetween
advertising,R&Dandmarket aluefigures.Thisapproachallows for a detailedconsiderationof the role played byfirm size andindustry onditionsandhas theadvantageof
avoidingindustryclassificationerrors or widely diversi-
fied firms. Such an analysis seems worthwhile n light of
findingsreportedby Acs and Audretsch 1]who study helarge-firmand small-firm hareof innovation n 247 four-
digit SIC industries.While not directly tested in their
analysis,Acs and Audretsch[1] suggestthatmeaningfulsize-baseddifferences n the effectiveness of R&Dspend-
ingmaybe observed orrelativelysmall firms.Thepoten-tial for size-based differencesin the valuationeffects of
advertisings also of interest; t lies at theheartof sugges-tions that high advertisingintensity creates barriersto
entry or newrivalsandbarriers omobilityfor established
nonleading irms.
Of similar nterest s the potential or industrycharac-
teristics o influencethe valuationeffects of both advertis-
ing and R&D. Forexample,the basic research ypicalof
high-tech irms s quitedifferent romtheappliedresearch
or developmentalworktypicalof the R&Deffort of firms
in low-tech sectors.Similarly, he valuation ffects of priceandproductpromotioncan also vary dependinguponthe
potentialandabilityof advertisers o build durablebrand
loyalty.Tocapture uchinfluences, ndustry ffectscan be
broadly ndicatedusinginterceptdummyvariable nterac-
tions fortwo-digitSIC ndustry roupclassifications.Such
two-digitSICdummyvariableshave the effect of isolating
the market value effects of advertisingand R&D fromotherindustry-specificvaluationconsiderations. n addi-
tion, the basic valuation model can be analyzed over
samples of advertising-intensive nd R&D-intensivein-
dustriesto learn the extent to which the valuationeffects
of advertisingand R&D expendituresare mitigated bysubstantial romotional nd nnovativeactivityby compet-itors.
By analyzing he overallsampleof firms, naddition o
a simple two-partbreakdownfor manufacturing ersus
nonmanufacturingirms,it becomes possibleto learn the
extentto whichexpenditures nadvertising ndR&D have
broadrather hannarrow mplications or the value of the
firm.By consideringthe marketvalue implicationsof a
three-part ample partitionaccordingto firm size (mea-
suredbysalesrevenue), heextentto whichfirmsizeplaysa role in determininghe marketvalue effects of advertis-
ing and R&D can also be learned.
III.EmpiricalEstimation
A.ComparativeResultsfor theManufacturingndNonmanufacturingSectors
Afterallowing for potentially mportant imultaneous
influencesamongrelationsdescribingmarketvalues and
other importantelements of marketstructure,Connollyand Hirschey [6] find no significant endogenous influ-
ences. Therefore, he model describedpreviouslyis esti-
mated through straightforward pplicationof ordinaryleast squares OLS).The model is estimated or eachyearwithin the 1988-1990 periodfor bothmanufacturingnd
nonmanufacturingectors,as well as over pooled cross-
sectionalsamplesof all available irmsforthe 1988-1990
period. In each annual regression, two-digit SIC code
interceptdummy variables are employed to control for
industry-relatedifferences n the marketvalueof thefirm.
In eachpooled
cross-sectionalsample regression,
these
two-digitSIC code interceptdummyvariablesaresupple-mented with annualdummyvariables o control for tran-
sitory influences relatedto overall stock market condi-
tions. Using an F-test, the hypotheses of no industry-relatedortime-related ffects can beeasily rejectedat the
a = 0.01 level for each sampleanalyzed.Using anF-test,the hypothesisof no difference in estimation results for
manufacturingversus nonmanufacturingndustriescan
also be rejectedat the a = 0.01 level. Since the annualand
pooled sample regressionsare uniform in terms of the
inferencesthey provide, only pooled sampleresults are
reported n the interestof saving space.Exhibit 3 offers broad-basedevidence of long-lived
benefits to advertisingand R&D by showingtheirvalua-
tion influencesfor size-basedsamplesof firms akenfrom
manufacturing ndnonmanufacturingectors.Accordingto census classificationcriteria,manufacturingirmsfall
within two-digit SIC code industrygroupsbetween 20
(foodandkindredproducts)and 39 (miscellaneousmanu-
facturingndustries).From Exhibit1, it is clearthatR&D
activity is concentratedamong firms from within the
manufacturing ector, whereas advertising expendituresare more broadly dispersed among both manufacturing
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136 FINANCIAL ANAGEMENTWINTER993
Exhibit 3. FirmSize and the Effects of Advertisingand R&D on the MarketValueof the Firm,1988-1990 (t-Statisticsin Parentheses)
COMPUSTATirms
Fromthe
Manufacturingector
(20 <SIC<
40)Cash Market Sample
FirmSize Class Intercept Flow Growth Risk Share Advertising R&D R F Size
Largestone-third 1,657.790 3.758 -0.159 -1,342.181 3.092 6.560 6.527 0.587 40.24b 764
(4.48)b (9.62)b (-0.05) (-3.28)b (0.61) (10.49)b (10.54)b
Middle one-third 346.658 5.330 -0.568 -261.028 2.320 2.395 3.599 0.415 19.41b 764
(4.66)b (12.82)b (-0.67) (-4.07)b (2.48)a (3.92)b (5.71)b
Smallest one-third 118.205 2.207 0.069 -25.360 0.739 4.120 5.382 0.246 9.26b 764
(3.82)b (7.40)b (1.61) (-1.56) (1.67) (4.48)b (9.48)b
All manufacturingirms 73.897 4.509 0.095 -19.051 1.479 7.047 6.216 0.571 111.54b 2,292
(2.33)a (22.91)b (1.94) (-1.07) (3.26)b (18.41)b (18.55)b
COMPUSTATirmsFromNonmanufacturingectors(SIC< 20 or SIC? 40)
Cash Market SampleFirmSize Class Intercept Flow Growth Risk Share Advertising R&D R2 F Size
Largestone-third 343.816 3.488 -2.842 -614.814 11.351 9.103 10.561 0.539 20.17b 787
(0.35) (15.06)b (-1.88) (-2.46)a (3.44)b (5.32)b (6.30)b
Middle one-third 180.770 2.303 0.734 -195.757 1.945 -0.102 11.582 0.365 8.66b 787
(0.65) (6.50)b (1.67) (-2.40)a (1.40) (-0.07) (5.76)b
Smallest one-third 146.791 1.941 0.118 -17.438 -0.555 7.811 -0.095 0.224 4.55b 787
(4.75)b (6.64)b (1.06) (-0.90) (-1.16) (3.70)b (-0.06)
All nonmanufacturingirms 140.582 4.260 0.101 -38.350 0.377 6.164 6.812 0.325 22.23b 2,361
(4.31)b (24.83)b (0.88) (-1.93) (0.81) (6.14)b (6.03)b
All COMPUSTATirms
Cash Market SampleFirmSize Class Intercept Flow Growth Risk Share Advertising R&D R2 F Size
Largestone-third 815.407 3.636 2.098 -904.632 7.467 6.725 6.956 0.587 34.73b 1,551
(0.85) (18.32)b (1.00) (-4.26)b (2.95)b (12.29)b (14.31)b
Middle one-third 363.996 2.531 0.633 -232.183 2.378 2.634 7.905 0.427 16.00b 1,551
(1.14) (10.26)b (1.51) (-4.56)b (2.94)b (3.77)b (11.33)b
Smallest one-third 147.190 2.108 0.059 -24.486 -0.054 5.178 3.556 0.210 5.88b 1,551
(5.48)b (9.92)b (1.25) (-1.85) (-0.16) (4.90)b (5.13)b
All firms 132.293 4.308 0.090 -32.095 0.754 6.928 6.466 0.437 50.75b 4,653
(4.71)b (34.16)b (1.85) (-2.40)a (2.33)a (17.24)b (18.60)b
Note:Statistically ignificant wo-digitSIC ndustry roupandannualdummy binary)variablesareestimated butsuppressed)n eachof theseweighted
least-squares egressionsoverpooled cross-sectionsamplesof firm data.
alIndicatestatistical ignificanceat the 0.05 level.bIndicates tatisticalsignificanceatthe 0.01 level.
andnonmanufacturingirms.By itself, therelativelycon-
centrated atureof R&Dactivitysuggeststhepotential or
a greaterevel of R&Deffectiveness nthemanufacturingsector. On the other hand, it is likely that advertising
expendituresgive rise to effective productdifferentiation
in a broadrangeof industries.
Despite some differences in explanatorypower be-
tween themanufacturingndnonmanufacturingectors, t
is clearfromExhibit 3 that a simplemodel candescribea
meaningfulshareof the firm-by-firmvariation n market
values.Inthemanufacturingector,morethanone-halfof
the variationnmarketvalues can be attributedo variation
in cashflows,growth,market hare,advertising nd R&D.
In the nonmanufacturingector,roughlyone-thirdof the
variation n marketvaluescan be similarlyattributed;he
only exception being thereplacementof growthwith risk
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CHAUVIN& HIRSCHEYADVERTISING,&DEXPENDITURES 137
as an important onsideration.Given the relativeconsis-
tency of valuationeffects due to advertisingand R&D in
the manufacturing nd nonmanufacturingectors, it ap-
pearssafetoargue hatbothtypesof expenditures iveriseto intangiblecapital.From an economicperspective,both
advertisingand R&D constitutealternative orms of in-
vestment n profitable ntangibleassets.An economically
appropriateccounting reatmentwould therefore nvolve
acapitalization ndamortizationreatmentypicalof other
formsof capitalexpenditures.Publicpolicythatallows an
immediate expense treatmentof advertisingand R&D
expendituresortaxpurposes,ratherhana moreeconom-
ically appropriate apitalizationand amortization reat-
ment,results n animplicittaxsubsidyforadvertisingand
R&D intensivefirms
(see Hirscheyand
Weygandt[11]).Therefore, hisfindingof long-livedbenefitsfor advertis-
ing and R&D expendituress of practical nterest o both
firmsandpublicpolicy-makers.And finally, in contrast o some popularassumptions
that stock market nvestors are myopic in their focus on
short-runperformance, hese findings suggest that inves-
tors evaluate the advertisingand R&D effort of firms
within a long-termperspective.
B. FirmSize EffectsAcs and Audretsch
1]find
higherevels of innovative
activity n industries hat eaturerelatively argefirms,but
that he elevated evel of creativeendeavoremanates rom
smaller rather hanlargercompetitors.Grilliches[9] re-
portsthatsmall (less than$2 million R&D) firmsappearmore "efficient" han their argercompetitors n thattheyare able to generatea relatively argernumberof patents
per dollarof R&D expenditure.As suggestedby Scherer
[19], the most favorable climate for rapidtechnological
progressmaybe an environment hat ncludeslargefirms
with the capacity to undertakeambitiousdevelopments
complementedby a large numberof small (below $500
millionsales) technologicallyorientedcompetitors.These findings suggest the potential for interesting
differencesin the effectivenessof R&D expendituresac-
cording o firmsize. Similarly,t is worth nvestigatinghe
potential orfirmsize effectson theeffectivenessof adver-
tising expenditures.To the extent that advertisingand
R&D effectiveness is influencedby firm size considera-
tions, the potentialexists for the marketvalue impactof
advertisingand R&D to differaccording o firmsize. To
theextentthateconomiesof scaleor othersize advantagesin advertisingand R&D are present, the market value
effect of a dollarin advertisingand/orR&D expenditures
will be greaterfor larger as opposed to smaller firms.
Conversely,to the extent that diseconomies of scale or
othersize disadvantagesn advertising nd R&D arepres-
ent,the market alue effectof a dollarof advertising nd/orR&D expenditureswill be moderated orrelatively argerfirms.
Exhibit 3 illustrates he influence of firm size on the
marketvalue effects of advertising ndR&Dexpenditures
using a simple three-partbreakdownof each sampleac-
cording to sales revenues.For example, over the entire
COMPUSTAT ample,the valuationmodel is estimated
for subsamplesof large-size(> $1,424.2 millionin sales,
$7,782.3 million average),medium-size($384.8 million
< middle< $1,424.2 million,$764.5millionaverage),and
small-size (< $384.0 million, $184.6 million average)firms. Samplesof manufacturing nd nonmanufacturingfirms are divided n a similar ashion. FromExhibit3, it is
clear that he valuation ffects of advertising ndR&Dare
consistentlypositiveand of a comparableorderof magni-tude for largefirms.By way of contrast,some variabilityis presentin termsof the valuationeffects of advertisingand R&D sponsoredby smaller irms.Interestingly,n the
nonmanufacturingector,no significantvaluationeffects
are associatedwith advertisingby medium-sizefirms nor
with small-firmR&D.
Aftercontrolling or other mportant aluationeffects,
evidence reported n Exhibit 3 suggests thatthe marketvalue influence of advertisingdoes indeed dependuponfirm size considerations.Usinga t-testof thedifference n
coefficients, the superiority of large-size firm over
medium-size irmadvertisings statisticallysignificant n
the manufacturing ector (t = 4.76), nonmanufacturingsector(t= 4.10), andfor all COMPUSTATirms(t= 4.46).
Similarly, he superiority f small-sizefirmover medium-
size firmadvertisings evident n themanufacturingector
(t = 6.45), nonmanufacturingector(t = 3.54), and for all
COMPUSTATirms(t = 5.33). Taken ogetherwith data
reportedin Exhibit 2, these findings suggest that sizeadvantagesare relevant n determining he valuation ef-
fects of advertising.At the sametime, it does not appearthat arge-size irmadvantages recludeeffective advertis-
ing by smaller,specializedfirms.Indeed,the advertisingof largefirms s moreeffective thansmall-size firmadver-
tising only in themanufacturingector(t = 2.19).The influenceof firmsize onthe stock market aluation
of R&D expenditures s also evident in the findingsre-
ported n Exhibit 3. Again, usinga t-testof the difference
incoefficients, hesuperiority f large-sizeoversmall-size
firmR&D is statisticallysignificant n the manufacturing
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138 FINANCIAL ANAGEMENTWINTER993
sector(t = 1.36),nonmanufacturingector(t = 5.99), and
for all COMPUSTATirms(t = 4.02). The superiorityof
large-size irmover medium-size irmR&D is also evident
in the manufacturingector (t = 3.13). Therefore,espe-
cially when the R&D-intensivemanufacturing ector is
considered, argefirmadvantagesn R&D are unmistak-
able. The superiority f medium-sizeover small-sizefirm
R&Dis less evident,butsignificantn thenonmanufactur-
ing sector(t = 2.07), and for all COMPUSTATirms(t =
1.85). The ability of smallerfirms to conduct effective
R&D shouldnot be overlooked,however,as evidencedbythe fact that superiorsmall-size firm over medium-size
firmR&Dis evident nthemanufacturingector t= 3.67).
Therefore,basedupona marketvalue perspective, he
advertisingandR&D
activityof
largerirms
appearso be
relativelymore effective than that of smallercompanies.These results areconsistentwith thepreviouslydiscussed
event-study esultson R&DreportedbyChan,Martin, nd
Kensinger[5] and Doukas and Switzer [7]. Just as the
market'sresponseto R&Dannouncements s more favor-
able in the case of larger spending ncreasesreportedby
largefirms, the marketcapitalizationof advertisingand
R&D seems to generally ncreasewithfirmsize.
C.IndustryEffects
Lustgartennd Thomadakis
14], buildinguponearlier
researchby Thomadakis 22], find that he cross-sectional
relationof Tobin's q to firm characteristics an depend
uponmarket tructurenfluences.Thus, hepotential xists
forthe marketvalueimplicationsof firm-specific eatures,such as marketshare,advertisingandR&D, to varywith
industry onditions.Insupportof thishypothesis,Doukas
and Switzer [7] suggest that the benefits accruingfrom
R&D expendituresmay be greater or firmsoperating n
industrieswhere the shareof industrysales concentrated
amongthe fourlargest irms s relativelyhigh.
Advertisingand R&D coefficientestimates n avalua-
tion model of this type, that differaccording o firmsize,offer evidenceof size-baseddifferences nadvertising nd
R&D effectiveness.Moderatelyreducedeffects of adver-
tisingand R&Don the marketvalueof smaller irmsmayreflect the fact that such efforts are often the focus of
rivalryand imitationby biggerand better-financedivals.
Alternatively,market value differences across smaller
firmsmay simplybe tied moreclosely to the fortunesof
specific industries,whereas large diversifiedfirms are
morebroadlypositioned o takeadvantage f scale advan-
tagesinadvertising, ndbothchance and ntendeddiscov-eries.
To further nvestigatethe extent to which the basic
valuation model results maybe influenced by industry-relatedconsiderations,Exhibit4 reports he marketvalue
effects of variations n the levels of advertisingandR&D
expendituresfor a variety of advertising-intensiveand
R&D-intensive(or "high-tech") ndustries.In both in-
stances,industrieswere arbitrarilyhosen on the basis of
having advertising ntensityor R&D intensityof at least
twopercentof sales as shown nExhibit1,plusa sufficient
number of observations or meaningfulanalysis.Based
uponthesecriteria, ix industrieswere chosen asrepresen-tative of the advertising-intensiveand R&D-intensive
("high-tech")ectors.Chemicalsandalliedproducts SIC
28) has the distinctionof appearingn bothcategories; t
is the sole industry group that displays high levels ofadvertising ntensityand R&D intensity.In addition to
industry-specificresults, findings are also reportedfor
pooledcross-sectional amplesof allfirms ncludedwithin
eachof theadvertising-intensivendhigh-techcategories.And finally, results are reportedfor all COMPUSTAT
firmsthatdevote morethantwo percentof sales to adver-
tising ("alladvertising-intensiveirms")or more thantwo
percentof sales to R&D ("allhigh-techfirms").When samples of firms are selected on the basis of
having high levels of advertising ntensityor R&D inten-
sity,as is the case here, then the amountof
samplevari-
ability in bothadvertisingntensityandR&D intensityis
necessarilyconstrained.This makes it relativelydifficult
to find statistically significant market value effects of
advertisingn samplesof advertising-intensivendustries.
Similarly, t is relativelydifficultto find statisticallysig-nificantmarketvalue effects of R&Din samplesof R&D-
intensive industries.It is thereforenot surprising o find
some industry-by-industryariability n the marketvalue
effects of advertisingand R&D, as shown in Exhibit 4.
Nevertheless,despitesome variabilitywithin various ad-
vertising-intensiveindustries, advertising intensity has
generallypositivemarketvalue effects across all advertis-ing-intensiveindustries and advertising-intensiveirms.
Similarly,despitesomevariabilitywithin ndividualhigh-tech industries,R&D intensityhas stronglypositive mar-
ket value effects across allhigh-tech ndustriesandhigh-tech firms.3
3Valuation ffects of advertising ndR&Dmaybe influencedbyfactors
thataffect thedegreeof congruencebetweenmanagerial nd stockholder
interests.To studythepossibilitythat the marketvalue effects of adver-
tising and R&Dmay be sensitive to agency problemconsiderations, he
basic valuationmodel was tested for both independentand interactive
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CHAUVIN&HIRSCHEYADVERTISING,&DEXPENDITURES 139
Exhibit 4. Intraindustryffects of AdvertisingandR&Don the MarketValueof theFirm n theAdvertising ntensiveand
High-TechIndustries,1988-1990 (t-Statistics n Parentheses)
Advertising/s ntensive ndustries
IndustryDescription Cash Market Sample(SIC Code) Intercept Flow Growth Risk Share Advertising R&D R2 F Size
Food and kindredproducts 20) 18.505 9.410 -0.549 -65.125 1.764 5.255 5.000 0.735 58.92b 179
(0.23) (9.08)b (-0.45) (-0.46) (1.36) (5.98)b (1.32)
Printingandpublishing 27) 145.879 9.019 -2.134 -92.228 -0.276 8.274 12.790 0.520 15.82b 126
(1.78) (9.64)b (-0.87) (-0.45) (-0.19) (3.41)b (0.71)
Chemicals and allied 19.680 4.931 -0.029 43.949 3.980 4.782 12.616 0.716 99.95b 326
products 28) (0.41) (8.99)b (-0.08) (0.85) (1.29) (5.17)b (15.00)b
Rubberandplastic 150.098 9.132 -0.563 -65.079 -1.969 2.618 -4.073 0.713 18.96b 70
products 30) (2.73)b (7.76)b (-0.46) (-0.51) (-0.80) (1.29) (-1.00)
Fabricatedmetalproducts 34) 98.265 6.177 -0.036 72.535 0.421 4.531 1.017 0.620 15.88b 87
(1.44) (6.98)b (-0.04) (0.63) (0.45) (3.84)b (0.26)
Eatinganddrinkingplaces (58) 16.508 11.763 0.234 -43.727 81.220 -5.980 N.A. 0.818 40.43b 71
(0.47) (11.51)b (1.09) (-0.90) (1.60) (-2.52)a
All firms n advertising/s 50.672 4.484 0.124 -8.614 2.235 5.536 12.319 0.611 71.38b 1,114
intensive ndustries (1.27) (15.03)b (0.77) (-0.30) (2.84)b (11.42)b (20.12)b
All advertising/s ntensive -36.563 1.992 0.227 -26.842 4.499 7.466 10.476 0.577 24.06b 972
firms (-0.39) (6.43)b (1.35) (-0.75) (3.55)b (13.48)b (15.78)b
R&D/S Intensive "High-Tech")ndustries
IndustryDescription Cash Market Sample(SIC Code) Intercept Flow Growth Risk Share Advertising R&D R2 F Size
Chemicals and allied 19.680 4.931 -0.029 43.949 3.980 4.782 12.616 0.716 99.95b 326
products 28) (0.41) (8.99)b (-0.08) (0.85) (1.29) (5.17)b (15.00)b
Industrialmachineryand 84.888 5.276 0.442 -55.741 4.944 3.528 2.848 0.642 75.18b 344
computer quipment 35) (3.23)b (10.50)b (2.40)a (-1.88) (4.72)b (2.70)b (5.33)b
Electronicequipment 36) 138.800 2.598 0.108 -53.848 0.666 9.499 4.173 0.507 28.16b 228
(4.05)b (4.02)b (1.77) (-1.28) (0.65) (5.42)b (4.92)b
Transportationquipment 37) 168.728 2.046 0.053 -12.327 2.712 -4.016 5.702 0.638 32.55b 157
(3.64)b (4.33)b (0.07) (-0.18) (1.86) (-2.30)a (7.81)b
Measuring nstruments, 79.669 9.301 0.246 21.946 0.694 1.458 0.903 0.614 38.85b 204
photography nd watches (38) (2.58)b (11.39)b (1.49) (0.53) (0.56) (0.67) (0.79)b
Business services(73) 97.144 8.102 0.078 -55.990 -0.350 8.446 3.034 0.540 26.87b 192
(2.49)a (9.86)b (0.29) (-1.24) (-0.18) (2.43)a (2.18)a
All firms n R&D/Sintensive 127.008 4.736 0.108 -23.664 2.071 5.658 6.112 0.562 120.12b 1,517
("high-tech")ndustries (4.35)b (17.25)b (2.04)a (-1.25) (3.12)b (10.11)b (15.91)b
All R&D/Sintensive -140.498 5.091 0.118 6.516 2.444 6.324 6.074 0.604 44.40b 1,115
("high-tech")irms (-0.67) (14.96)b (1.93) (0.27) (2.19)a (9.01)b (13.00)b
Notes:
Statistically significant two-digit SIC industrygroupand annualdummy(binary)variables are estimated(but supressed) n each of these weightedleast-squares egressionsoverpooledcross-sectionsamplesof firmdata.
N.A. means "notapplicable" ndrefersto asubsample hat did not includeanyfirms withR&Dspendingoverthe 1989-1990 period.alndicates tatistical ignificanceat the 0.05 level.
blndicates tatisticalsignificanceatthe 0.01 level.
effects of thepercentageof closely heldshares,measuredby the shareof
stock heldby insidersand argeoutside nterests.However,no consistentand material nfluence of the percentageof closely held shares on the
valuationeffects of advertisingand R&D was noted(at the 0.05 level).
This suggests thatthe role played by agency problems n modelingthevaluationeffects of advertisingand R&D is somewhat angential o themain thrustof thisresearch.
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140 FINANCIAL ANAGEMENTWINTER993
IV.ConclusionsPositive effects of advertisingand R&D expenditures
on the marketvalueof thefirmare llustratedn thispaperfor broadly representative samples of COMPUSTAT
firms. Like currentcash flow, growth,risk, and market
share,advertisingand R&D expendituresconstitutekeydeterminants f the marketvalue of the firm. The market
value effectsof advertising ndR&Darebroadlyoperative
throughoutboth manufacturingand nonmanufacturingsectors.As such,advertising nd R&Dappearas attractive
alternativemeans of investmentin valuable intangible
capital hathavedifferingdegreesof relevance ndifferent
economic sectors.
Findings reportedhere also suggest the potentialfor
interestingdifferencesin the effectivenessof advertisingand R&Dexpendituresaccording o firm size. Consistent
with R&D event-studyresultsreportedby Chan, Martin,andKensinger 5] andDoukasand Switzer[7], size advan-
tages exist in advertisingand R&D activity;the market
value effectof a dollar n thesetypesof expendituresends
to be greater orrelatively arger irms.Still, the evidence
also suggests thatadvertisingand R&D expendituresby
smaller,specializedfirms can be highly effective. While
thereareobviously importantdifferencesbetweenadver-
tising andR&D, these two types of expenditurescan be
regardedas alternativeorms of investment n intangible
capitalthat contributeo shareholder alue.
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