Marketing finance interface
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This is a short presentation I made to the IIM-Ahmedabad PGPX program participants at ESSEC Singapore campus. It outlines some very basic ideas about marketing-finance interface and introduces them to ...

This is a short presentation I made to the IIM-Ahmedabad PGPX program participants at ESSEC Singapore campus. It outlines some very basic ideas about marketing-finance interface and introduces them to my own research. It is meant for practitioners and therefore less rigorous. All the material is copurighted. Don't share without the author's permission.

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Marketing finance interface Marketing finance interface Presentation Transcript

  • Marketing-Finance Interface
    Prof. Ashwin Malshe
    September 6, 2011
    To
    IIM-A PGPX
  • About Ashwin Malshe
    PhD (Marketing), MMS (Marketing), BE (Electronics)
    Seven years industry experience
    Institutional sales
    Analytics
    With ESSEC since July 2011
    Multiple research interests
    Marketing strategy
    Marketing-finance interface
    Consumer behavior
    Social media marketing
    Blogging activities
    Micro-Positioning
    Flirting with Finance
    2
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    Marketing-Finance Interface
  • Marketing Metrics
    Measuring the impact of marketing strategies has been tough
    Strategies by definition are long-term
    Over a longer term many confounding effects can add noise
    The outcome variables are not universally defined
    • Net sales/ gross sales
    • Number of customers
    • CLV
    • Profitability, etc.
    Rich research exists in marketing to measure marketing’s impact on traditional metrics
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    Marketing-Finance Interface
  • Traditional Metrics are not Sufficient
    The top management is more concerned about stock prices
    The link between existing metrics and stock prices is not obvious
    Many existing metrics are subject to manipulation by the managers
    Investors may not trust them
    • Groupon’s “Adjusted Consolidated Segment Operating Income”
    • Sales figures can be manipulated, e.g., channel stuffing
    Managers themselves may not trust them
    • Various social media marketing metrics
    4
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    Titre de la présentation
  • Financial Market Metrics
    Capital market metrics are, on average, difficult to manipulate in a well functioning financial market
    Securities laws
    Corporate governance
    Shareholder activism
    Arbitrageurs
    In efficient markets, prices are unbiased estimates of the market participants’ expectations about future cash flows
    Financial market metrics are superior to firm’s internal metrics
    The price changes can be extremely fast
    5
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    Marketing-Finance Interface
  • Marketing and Shareholder Value
    𝐹𝑖𝑟𝑚 𝑉𝑎𝑙𝑢𝑒= 𝐸(𝐶𝑎𝑠h 𝐹𝑙𝑜𝑤𝑠)𝐸𝑅𝑎𝑡𝑒 𝑜𝑓 𝑅𝑒𝑡𝑢𝑟𝑛−𝐸(𝐺𝑟𝑜𝑤𝑡h 𝑅𝑎𝑡𝑒)
    𝐸(∙) operator denotes the expectations
    How marketing affects
    The magnitude of expected cash flows
    The risk of the expected cash flows
    The growth rate of the expected cash flows
     
    6
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    Marketing-Finance Interface
  • Marketing-Finance Interface
    7
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    Marketing-Finance Interface
    Focus of the Extant Marketing Literature
    Finance
    • Firm Value
    • Stock Returns
    • Systematic Risk
    • Idiosyncratic Risk
    • Liquidity Risk
    • Cost of Debt
    Marketing
    • Innovation
    • Brand Equity
    • Corporate Social Responsibility
    • Supply Chain Relations
    • Strategic Alliances
    • Customer Satisfaction
  • Examples
    Rao, Agarwal, and Dahlhoff (2004) study how manifest branding strategy affects firm value
    Corporate branded firms have higher firm value on average
    Firms with house-of-brands strategy faired less well
    Luo and Bhattacharya (2006) argue that CSR leads to higher customer satisfaction, which in turn increases firm value
    McAlister, Srinivasan, and Kim (2007) show that advertising and R&D intensities reduce firm’s CAPM “beta”
    R&D may actually increase a firm’s risk (Berk, Green, and Naik 1999; 2004)
    8
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    Marketing-Finance Interface
  • Focus of My Talk Today
    Advertising and firm value
    Endogeneity of marketing strategy
    9
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    Marketing-Finance Interface
  • Advertising and Liquidity Risk
    Advertising creates value through multiple channels
    Increased cash flow
    Reduced market risk
    Increased liquidity
    Advertising can also reduce liquidity risk – the risk that a stock can’t be traded when market returns are low
    Advertising increases individual investor awareness
    Individual investors tend to be liquidity providers
    The spillover effect due to advertising can be as high as 1.3% of shareholder value
    10
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    Marketing-Finance Interface
  • My Research Focus
    11
    05/09/2011
    Marketing-Finance Interface
    Focus of the Extant Marketing Literature
    Finance
    • Firm Value
    • Stock Returns
    • Systematic Risk
    • Idiosyncratic Risk
    • Liquidity Risk
    • Cost of Debt
    Marketing
    • Innovation
    • Brand Equity
    • Corporate Social Responsibility
    • Supply Chain Relations
    • Strategic Alliances
    Focus of My Research
    • Customer Satisfaction
    • Capital Structure
  • Capital Structure and Satisfaction
    Firms with more debt experience higher pressure to meet the interest payments
    Limited flexibility (Fresard 2010)
    Cost-cutting in long-term investments (Peyer and Shivdasani 2001)
    Investments in intangible assets such as customer satisfaction are difficult to justify and therefore easy to cut under pressure
    Cutting advertising for brand building
    Reducing product and service quality (Maksimovic and Titman 1991; Matsa 2011)
    Changing the pricing policy (Chevalier 1995)
    Indebted firms are likely to invest less in customer satisfaction as it generates cash flows in the long term
    12
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  • Key Findings
    Indebted firms have lower customer satisfaction on average
    The negative relationship exists only for the firms that have fewer growth opportunities
    Managers of low growth firms might be overinvesting in customer satisfaction
    Debt acts as a disciplining mechanism
    Higher customer satisfaction reduces firm value when the debt levels are higher
    This indicates that using debt to reduce free cash flows is actually a value increasing strategy
    13
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  • Thank You!