Marketing Papers

Document Type

Journal Article

Date of this Version

1-2014

Publication Source

Management Science

Volume

60

Issue

1

Start Page

227

Last Page

245

DOI

10.1287/mnsc.2013.1748

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.

Keywords

advertising, brand value, stock returns, structural model, marketing and finance

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Date Posted: 27 November 2017

This document has been peer reviewed.