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
      05/09/2011
      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
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    • Thank You!