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  • School of Business and Economics Advertising in a Recession The Effects of Advertising on Brand EquityMaastricht UniversitySchool of Business and EconomicsMaastricht, 17.01.2011Author: Benedikt Laufenberg i409170Study: MSc IB / Marketing-FinanceAssignment: Master ThesisSupervisor: Dr. Elisabeth Brüggen 1
  • “There’s no more exiting time to be in the advertising business than during arecession. All great enterprises move forward in a recession, and the weaklings move back. The dumbbells cut back on advertising. The smart people don’t.” Ed McCabe, founding partner, Scali, McCabe, Sloves, Inc. 2
  • Table of ContentsAbstract ..................................................................................................................................... 1I. Introduction........................................................................................................................... 2II. Literature Review................................................................................................................ 4 1. Effects of Advertising ......................................................................................................................4 1.1. Advertising and Sales Response...............................................................................................4 1.2. Advertising and Firm Value Response .....................................................................................6 2. Advertising in a Recession.............................................................................................................11 2.1. Declining Advertising Expenditures ......................................................................................11 2.2. Effects of Advertising in a Recession.....................................................................................12 3. Hypotheses .....................................................................................................................................14III. Data and Methodology .................................................................................................... 16 1. Advertising.....................................................................................................................................16 2. Brand Equity ..................................................................................................................................16 3. Other Variables ..............................................................................................................................17 3.1. Three-Year Advertising Growth.............................................................................................17 3.2. Industry Sector........................................................................................................................17 4. Dataset............................................................................................................................................17 5. Regression Modeling .....................................................................................................................18IV. Analysis and Results ........................................................................................................ 20 1. Descriptive Statistics......................................................................................................................20 1.1. Advertising .............................................................................................................................20 1.2. Brand Equity...........................................................................................................................21 2. Preliminary Analysis......................................................................................................................22 3. Regression Analysis.......................................................................................................................24 3.1. Pre-Tests .................................................................................................................................24 3.2. Results ....................................................................................................................................25V. Discussion ........................................................................................................................... 28 1. Managerial Implications ................................................................................................................28 2. Theoretical Implications ................................................................................................................29VI. Limitations and Future Research................................................................................... 30VII. Conclusion....................................................................................................................... 32Appendix ................................................................................................................................. 33 3
  • AbstractThe main objective of this study is to contribute to the discussion of how firms should adjusttheir advertising budget in a recession. Prior researchers find that companies, which increasetheir recessionary advertising, mainly benefit in terms of sales and market share. Their studiesare, however, criticized because sales and market share only reflect a firm’s relativecompetitive position and are not good indicators of financial success. Literature, which isdealing with the accountability of marketing, recommends to measure the effects of marketingon the long-term market value of firms and in particular on the so called market-based assets.No study has yet analyzed the effects of recessionary advertising on market-based assets. Toclose this gap in the literature, this paper relates advertising expenditures to the market-basedasset that is mainly created and maintained by advertising efforts, the firm’s brand equity. Bythe means of multiple regression analysis, the relation between advertising and brand equity isanalyzed for an expansion year (2004/2005) and a recession year (2007/2008). It is found thatthe relation is positive during both periods which implies that advertising increasers generallybuild brand equity, whereas advertising decreasers destroy it. Second, it can be shown that therelation is stronger during a recession than during an expansion. This suggests that advertisingis a very effective tool to increase brand equity during economic downturns. Overall, thisstudy finds strong arguments to resist the cost cutting pressure during recessions and tomaintain or even increase the recessionary advertising budget. An overview of the managerialand theoretical implications of the results, as well as some recommendations for futureresearch are given at the end of the paper. 1
  • I. IntroductionToday’s globalized business world is characterized by fierce competition (Rogoff, 2006) andrequires companies to operate in a very cost efficient way. The different departments within afirm have to carefully account for their spending and to demonstrate the contribution of theirefforts to financial performance. In the past, marketers often failed to do so because theyevaluated their activities based on sales and market share that only reflect a firm’s relativecompetitive position (Day and Fahey, 1988). Hence, they often had problems to identify,measure and communicate the financial value of their activities (Srivastava, Shervani, andFahey, 1998). This lack of financial accountability undermined marketing’s credibility andchallenged its existence within the firm (Rust, Ambler, Carpenter, Kumar, and Srivastava,2004). With the emergence of the shareholder value concept in the 1980s it becameincreasingly important to demonstrate the contribution of business decisions to the firm’slong-term market value. In line with that development, researchers started to analyze theimpact of marketing activities on shareholder value (e.g. Anderson, Fornell, andMazvancheryl, 2004; Gruca and Rego, 2005; Srivastava et al., 1998; Wang, Zhang, andOuyang, 2008). Those investigations set a milestone in the ‘accountability of marketingdiscussion’ because it could be shown that marketing develops so-called market-based assetsthat, in turn, have a positive impact on shareholder value. The current study is an attempt toextend this literature stream by analyzing advertising effects on market-based assets in thecontext of a recession.During recessions, managers are often looking for expenses that can be easily reducedwithout disrupting the firm’s operations. Marketing expenditures are predestinated for thisand, therefore, usually the first to be cut (Shaw and Merrick, 2005). How those cutbacksaffect the value of firms is not very clear. Despite the severe effects of recessions onmarketing, little research exists about it. A few researchers study recessionary advertisingeffects on a firm’s level of sales, market share or earnings (e.g. Aaker and Carman, 1982;Clarke, 1976; Graham and Frankenberger, 2000; Leone, 1995; Tellis, 2009; Tull, 1986). Nostudy, however, examines the long-term effects of advertising on the firm’s most valuableassets, its market-based assets. In an attempt to close this gap in the literature, this paperanalyzes the relationship between recessionary advertising and brand equity, one of the mostimportant market-based assets. In a second step, the relation between advertising and brandequity is analyzed in a non-recessionary period. A comparison of the results will help toanswer the central question: 2
  • “How should firms adjust their advertising budget in a recession?”The remainder of this study is structured as follows: Chapter II reviews relevant literature onadvertising effectiveness and introduces the hypotheses. Chapter III presents the data anddevelops the methodology used for this investigation. The results are reported in chapter IVand discussed in chapter V. Chapter VI highlights the study’s limitations and providessuggestions for future research. The conclusion, outlined in chapter VII, summarizes the mainfindings and gives an answer to the central question of this research. 3
  • II. Literature ReviewBefore answering the question of how firms should adjust their advertising budget in arecession, it is necessary to understand how advertising works and how it affects a company.This understanding is provided in the first part of this chapter followed by a review of studieson advertising in a recession.1. Effects of AdvertisingAdvertising can be defined as “any non-personal presentation and promotion of ideas, goodsor services by an identified sponsor” (Keller, Apéria and Georgson, 2008, p.230). It is usuallycommunicated through various media channels, such as television, radio, newspapers,magazines, internet or billboards, and it intends to persuade potential customers to purchase acertain product or service. In order to show how value-adding advertising is for a company,marketers need to measure the return on their efforts. This chapter discusses two commonways of how to measure the return on marketing. The first one is more short-term orientedand considers market-response measures such as sales or market share. The second takes along-term perspective and measures the economic (cash flow-derived) benefits created bymarketing. The focus of this second approach is on the value components of firms. Mainlydiscussed are the effects of advertising on market-based assets as well as on the firm’sshareholder value. An extensive overview of literature on sales and firm value response toadvertising is provided in the following two subsections.1.1. Advertising and Sales ResponseThe marketing literature to date mainly focuses on the sales response to advertising (Joshi andHannsens, 2010). This might be due to the fact that advertising is often understood as a toolthat helps to produce sales (Lavidge and Steiner, 1961). This was already taught in the 1960swhen Lavidge and Steiner developed the hierarchy-of-effects model (see Figure 1). At thebottom of the hierarchy are the potential customers who are not yet aware of the existence ofa product or service while at the top are the ones who are already purchasing it. The main taskof the advertiser is to guide the potential customer through the different stages of thehierarchy (awareness, knowledge, liking, preference, conviction and purchase) and make herloyal to the company’s products or services. Frequent purchases of loyal customers finallyincrease the sales of a company. Hence, it makes sense to measure advertising effectivenessby relating advertising expenditures to the company’s sales. In the past, researchers agreedthat this is one of the most difficult and complex problems in marketing (e.g. Bass, 1969; 4
  • Simon and Arndt, 1980). Although it is still a big challenge today, it became easier over thelast two decades. The ability to accurately evaluate the effects of advertising has grownbecause technology became more advanced and databases more extensive. According to Hessand Ambach (2002), researchers in the 60´s still relied on data of warehouse withdrawals tomeasure sales and market share. Then, in the 70’s, universal-product-code scanners emergedwhich made it possible to correlate information on customer purchases directly with theinformation on advertisements those customers receive. Today, comprehensive tools, such asthe Nielsen TV Audience Measurement, accurately track a program’s minute-to-minuteaudiences and help firms to measure the effectiveness of their campaigns.Figure 1. Hierarchy of Effects Model Purchase Conviction Preference Liking Knowledge AwarenessResearch focusing on sales response to advertising, is referred to as sales or market responseanalysis (Vakratsas and Ambler, 1999). In order to estimate how the market responds toadvertising, researchers often calculate advertising elasticity, which is the percentage changein sales for a 1% change in the level of advertising. After summarizing a great number ofstudies using data across many time-periods, brands, product categories and countries, Tellis(2009) arrives at the empirical generalization that sales change by about 0.1% if advertisingchanges by 1%. Additionally, the author concludes that the elasticity is higher in Europe thanin the United States, for durables than for non-durables, for new products than for establishedproducts, and for print advertisements than for TV advertisements. Next to the impact ofadvertising also the duration of its effects is important. As one of the first researchers, Clarke 5
  • (1976) provides a general answer to the question of how long advertising affects sales. Afterreviewing 69 studies of the econometrics literature he concludes that the effect only lasts formonths rather than years. Many researchers after Clarke also analyzed the duration period butarrive at widely varying estimates. The inconsistency of those results was not helpingmarketers to make accurate decisions about an appropriate size of their advertising budget.Leone (1995) brought an end to this uncertainty. He reasons that the level of data aggregation(e.g. monthly data) across the studies is responsible for the variation in results. Afterreviewing relevant literature and adjusting for aggregation bias he finds that the effects lastbetween six and nine months.Overall, it can be concluded that advertising has an impact on sales and that it can bequantified by its strength and the duration of effects. However, it should not be forgotten thatthe success of an advertising strategy also depends on external factors, such as competitorbehavior or customer trends, which are often not predictable. Many companies, therefore,have difficulties to determine the optimal advertising budget and often allocate too muchmoney to it (Aaker and Carman, 1982; Tull, 1986). According to Aaker, Carman and Tullthis might not necessarily be a disadvantage if it stays within a certain band around thetheoretical optimum. Tull states that overspending on advertising by as much as 25% may berelatively inexpensive and can even produce long-term benefits by increasing sales andmarket share.1.2. Advertising and Firm Value ResponseRelating marketing activities all the way to a firm’s financial position has been widelyneglected in the literature and only recently attracted researcher’s attention. In the previoussection it is shown that marketing effectiveness was traditionally determined by looking atsales responses. According to Day and Fahey (1988) those responses do, however, onlyreflect a firm’s relative competitive position and are not appropriate indicators of financialsuccess. As a consequence, the marketing function often has problems to justify itsexpenditures and to demonstrate the value it adds to the firm. This lack of financialaccountability has not only undermined marketing’s credibility; it “even threatenedmarketing’s existence as a distinct capability within the firm” (Rust, Ambler, Carpenter,Kumar, and Srivastava, 2004, p.76). The accountability of marketing expenditures is one ofthe major research priorities of the Marketing Science Institute (2010) for the years 2008-2010 and, therefore, it is of crucial importance to investigate the link between marketing 6
  • activities and the value of a firm. Traditionally, the marketer’s goal was to create value forcustomers, ignoring the fact that shareholders are the true owners of a company (Srivastava,Shervani, and Fahey, 1998). Today, researchers (Day and Fahey, 1988; Srivastava et al.,1998) suggest that every investment, be it in the area of human resources, operations ormarketing, should be evaluated based on its contribution to shareholder value. For marketersit means that they should go for marketing strategies that achieve returns exceeding the costof invested capital and that result in positive net present values (Day and Fahey, 1988; Koller,1994). Those strategies help to increase the share price of a company or more specifically thefirm’s shareholder value. The main advantage of taking shareholder value as a performancemeasure is its risk-adjusted and forward-looking characteristic and that it integrates differentperformance dimensions, such as earnings volatility, cash flows, and profits (Day and Fahey,1988; Deleersnyder, Dekimpe, Steenkamp, and Leeflang, 2009). It reflects the long-termvalue of a firm and, therefore, is a better indicator of financial health than other, short-termoriented measures such as sales or market share. The shareholder value approach becamepopular in the 1980s (Bloomberg Businessweek, 2009) when Jack Welch, former CEO ofGeneral Electric, suggested that every business decision should first and foremost benefit theshareholders of a company. Ever since, shareholder value gained in importance (Day andFahey, 1988; Lukas, Whitwell, and Doyle, 2005; Srivastava et al., 1998) and became acorporate performance standard to evaluate investment proposals.Evaluating marketing expenditures based on their contribution to shareholder value is a rathernew trend in the marketing literature. It was done by, for example, Chauvin and Hirschey(1993), Conchar, Crask, and Zinkhan (2005), Graham and Frankenberger (2000) and Millerand Mathisen (2008) who find that advertising affects firm value over multiple periods oftime. Due to the potential of advertising to increase the long-term value of a firm theresearchers even argue that advertising should be treated as a capital expenditure rather thanas an expense1. Miller and Mathisen show that investments in advertising are more valuablethan investments in any recorded assets and that they have a lifetime value of two years.Chauvin and Hirschey observe a positive relation between advertising and market value forcompanies across manufacturing and non-manufacturing sectors. They control for firm sizeand, thereby, find that the valuation effects are typically greater for larger firms than forsmaller firms. Graham and Frankenberger compare companies in different industries and1 US GAAP requires marketing expenditures to be expensed against revenues. 7
  • show that advertising expenditures affect earnings up to five years after the year of theexpenditure. Those effects have a subsequent impact on the market values of companies,being shortest lived for companies in the sales and services industry and longest lived forcompanies in the industrial products industry. On average, Graham and Frankenberger reportthat the asset value of advertising expenditures has a three-year life with the greatest value inthe current year and declining value in subsequent years. The study by Conchar et al.aggregates the findings of a great number of market valuation models in a meta-analysis. Theresults strongly support the positive effects of advertising on a firm’s market value and,hence, on the wealth of shareholders.The next three sections go more into detail on the effects of advertising on firm value. Inparticular, it is reviewed how advertising effects the intangible value of firms. Sinceintangible assets play an increasing role in today’s business world (Lindemann, 2004)researchers start to focus particularly on the relationship between advertising and the so-called intangible market-based assets.a) Intangible Firm ValueThe importance of intangible firm value only emerged in the last quarter of the 20th century(Lindemann, 2004). Before that time, tangible assets such as manufacturing assets, land,buildings or financial assets were seen as the main source of firm value. In the 1980s, largepremiums were paid in mergers and acquisitions, and the gap between market and bookvalues of companies was increasing. Today it is widely accepted that this gap is due tointangible assets and that the majority of firm value is derived from those assets (Lindemann,2004; Srivastava et al., 1998). Srivastava et al., for example, find that more than 70% of acompany’s market value lies in intangible assets.In an attempt to relate marketing activities to intangible assets, Srivastava et al. (1998)developed a framework which proposes that marketing develops and manages intangiblemarket-based assets that, in turn, increase shareholder value by accelerating and enhancingcash flows, reducing the volatility and vulnerability of cash flows, and by increasing theirresidual value. The authors distinguish between intellectual market-based assets that arecreated through the knowledge a firm possesses about an environment, and relational market-based assets that are the outcome of relationships with different stakeholders of the company.Since advertising establishes relationships between a company and its customers it mainly 8
  • contributes to the development of relational market-based assets, such as brand equity(Srivastava et al., 1998).b) Brand EquityThe first precise definition for brand equity was given in 1988 when The Marketing ScienceInstitute organized a conference on “Defining, Measuring, and Managing Brand Equity”. Atthis conference, brand equity was defined as: “the set of associations and behavior on the partof a brands customers, channel members and parent corporation that permits the brand toearn greater volume or greater margins than it could without the brand name” (as cited inWood, 2000, p.663). In short, brands influence the choices of different stakeholders andthereby contribute to the profitability of a firm.The idea that brands contribute to business success is widely accepted today. It is also knownthat brands often account for the majority of overall firm value. The McDonalds brand equity,for example, accounted for more than 70% of shareholder value in the year 2004 (Lindemann,2004). PricewaterhouseCoopers and Sattler (2005) show that the brand of an average Germanfirm represented about 56% (67%) of total firm value in the year 1999 (2005). Despite theimportance of brand equity in today’s organizations, quantitative brand valuations are rarelyconducted (Zimmermann, Klein-Bölting, Sander and Murad-Aga, 2002). This is surprisingbecause value-oriented brand management does not only concern brand managers; it alsoplays a major role for other business functions, such as controlling. Zimmermann et al., fromthe worldwide advertising agency BBDO, mention four reasons why brands should beevaluated. First, they argue that brand valuations allow for better brand controlling. Due torising marketing expenditures, managers need a quantifiable basis to justify the investmentcharacter of their expenditures. By reporting the monetary value of brands over time, they canbetter assess the long-term effects of their marketing activities. Second, it facilitates thenegotiation process when selling/buying a brand. Third, it helps to negotiate a license fee incase the brand is licensed to another company. Fourth, in case of trademark infringement,monetary brand values can be used to determine a compensation for the suffered loss.Lindemann (2004), Managing Director of Interbrand Global Brand Valuation, states thatbrand valuation models can be categorized into two groups: Research-based brand equityvaluations and purely financially driven approaches. Research-based brand equity valuationsuse consumer research to analyze the relative performance of brands. They do not consider 9
  • any financial value but measure consumer behavior and attitudes that influence the economicperformance of brands. Perceptive measures are used in those models as, for example,different levels of familiarity, purchase consideration, preference, satisfaction or awareness.The financially driven approaches can be sub-categorized into cost-based approaches,comparables approach, premium price approach and economic use approach. Lindemannargues that the economic use approach is the most widely recognized and acceptedmethodology for brand valuation because it combines marketing and financial components,and it is not like the other approaches, just driven by one of them. It incorporates marketing,financial and legal aspects, follows fundamental accounting concepts, allows for regularevaluation in a consistent way and is suitable for acquired and home grown brands (Keller etal., 2008). Overall, the approach evaluates brand value by determining the present value ofcash flows that a brand is expected to generate in the future.A few years ago Interbrand as well as some other firms (e.g. MillwardBrown and BBDO)recognized the need to express brands in monetary terms and started to report brand values ona regular basis. The economic use approach applied by Interbrand evaluates brands by goingthrough the following steps. First, the consumer market for a brand is split into non-overlapping and homogenous groups of customers. Second, the earnings generated by a brandare forecasted for every segment by subtracting operating costs, applicable taxes and a chargefor employed capital from the branded revenues. Third, the role2 that a brand plays in drivingdemand is assessed. By multiplying the role of branding by the intangible earnings derived inthe second step the brand’s earnings are calculated. Fourth, the competitive strengths andweaknesses of the brand are assessed. Based on that fourth step, the brand discount rate,which reflects the risk profile of the expected future earnings, is derived. Finally, theforecasted earnings are discounted at the brand discount rate in order to arrive at the netpresent value of the brand.c) Advertising – Brand Equity – Shareholder ValueAccording to Srivastava et al. (1998), brand equity is the result of extensive advertising.Although other marketing efforts are also important in building and maintaining brand equity,Ailawadi, Farris and Parry (1994) and Keller et al. (2008) argue that advertising plays thegreatest role. The relation between advertising and brand equity is confirmed by a very recent2 The role that a brand plays in driving demand is expressed by the “role of branding index”. This index standsfor the percentage of intangible earnings that are generated by a brand. 10
  • study from Wang, Zhang, and Ouyang (2008). The results indicate that the intermediateeffects of advertising on shareholder value (i.e. the effects of advertising on brand equity) areaccumulative and sustainable and support the investment-like characteristic of advertisingexpenditures. Other researchers (Kerin and Sethuraman, 1998) focus on the relation betweenbrand equity and shareholder value and observe that brand equity is positively associated withthe market value of firms. Furthermore, it is found that this relation is often stronger than therelation between book value, or net income and the firm’s market value (Barth, Clement,Foster, and Kaszkik, 1998).This first part of the literature review critically examined studies which illustrate the effects ofadvertising on different performance measures. It becomes clear that most of themconcentrate on the sales response to advertising. There is, however, an increasing interest inthe effects of advertising on shareholder value. In order to relate marketing efforts, such asadvertising, to shareholder value, researchers (e.g. Srivastava et al., 1998) suggest to focus onthe intermediate market-based assets. Since brand equity is one of the most important(market-based) firm assets (PricewaterhouseCoopers and Sattler, 2005) and directlydependent on advertising, special attention was, and further is, directed to the relationshipbetween advertising and brand equity in this study. In the following, the terms brand equityand brand value are used interchangeably.2. Advertising in a RecessionDuring recessions marketers usually decrease their advertising budgets. So far, only a fewresearchers studied in how far those changes affect the performance of firms. Beforereviewing those studies in subsection 2.2 it is examined how firms usually adjust theiradvertising budgets in a recession.2.1. Declining Advertising ExpendituresWhat is a recession? Analysts usually refer to a recession when economic activity, measuredby real GDP, is declining for at least two consecutive quarters (Claessens and Kose, 2009).The National Bureau of Economic Research (NBER) uses a broader definition. NBER’sBusiness Cycle Dating Committee (Hall et al. 2003, p.1) defines a recession as “a significantdecline in economic activity spread across the economy, lasting more than a few months,normally visible in real GDP, real income, employment, industrial production, andwholesale-retail sales. A recession begins just after the economy reaches a peak of activity 11
  • and ends as the economy reaches its trough. Between trough and peak, the economy is in anexpansion. Expansion is the normal state of the economy; most recessions are brief and theyhave been rare in recent decades.”It is widely known that companies often cut back their costs during recessions. Marketingbudgets in general and advertising budgets in particular are such endangered targets. This issupported by an investigation of KPMG which illustrates that the budget most likely to be cutis the one of marketing. Marketing budgets are reduced with a probability of more than 20%followed by cuts in Human Resources, Training, R&D and IT budgets (Shaw and Merrick,2005). Picard (2001) was one of the first who studied economy effects on advertisingexpenditures and concludes that a 1% (3%, 6%) decline in GDP is generally accompanied bya 5% (10%, 15%) decline in advertising expenditures. Another study (Deleersnyder et al.,2009) observes that 88% of firms cut their advertising expenditures during economicdownturns and increase them during expansions. On average, Deleersnyder et al. find that a1% change in GDP results in a 1.4% change in advertising expenditures in the same direction.Two main reasons are discussed in the marketing literature why advertising budgets are cut ina recession (Dhalla, 1980; Tellis, 2009). First, executives hope to increase short-termprofitability. Second, executives think that they can maintain their market position by reactingin the same way as their competitors. By reviewing literature on the effectiveness ofrecessionary advertising in the next section, it is determined whether those arguments can bejustified.2.2. Effects of Advertising in a RecessionThe previously reviewed studies demonstrate that companies usually decrease theiradvertising expenditures in a recession. Although there might be good reasons for doing so(e.g. companies become financially constrained and consequently have to cut back theircosts), one should be aware of the subsequent effects of lowering the marketing budget.Thomas Garbett (1988) analyzes the dramatic case of discontinuing advertising and finds thatthe customer’s attitude about a company is likely to quickly deteriorate and to shift inunintended directions. This, in turn, has a negative impact on the firm’s profitability. Someresearchers argue that an increase of advertising during a recession would generally be abetter choice. The idea to maintain or increase advertising expenditures during a recessionfirst came up in the 1920s when Vaile (1926) analyzed 200 companies in the 1923 recession.Overall, he finds that an increase of advertising is associated with sales growth for up to four 12
  • years after the recession. The more recent article by Kamber (2002) concludes that anadvertising increase during a recession leads to an immediate boost of sales that diminishes inthe years thereafter. Other studies investigate the effects on market share rather than on sales.Kijewski (1982), for example, finds that it is a lot easier to capture market share fromcompetitors by making use of countercyclical advertising. In particular, she finds that 80% ofbusiness units in her sample increase advertising expenditures during an expansion, whileonly 25% increase advertising expenditures during a recession. Overall, she concludes thatthe effectiveness of advertising is a lot higher during a recession when companies areoperating in a soft advertising market in which advertising competition is reduced. Biel andKing (1990) arrive at a similar conclusion and additionally emphasize that large increases ofrecessionary advertising are much more productive than modest increases. It can beconcluded that a drastic increase of advertising expenditures in a recession is more effective(with respect to sales and market-share growth) than an increase of advertising expendituresduring an expansion.As it is stated in section 1.2 in the literature review, focusing on sales and market share aloneonly informs about a firm’s relative competitive position but does not provide informationabout a company’s financial success. To the author’s knowledge, no study exists that relatesrecessionary advertising directly to the shareholder value or market-based assets ofcompanies. However, the studies discussed in the following take some other financialmeasures into account. Kijewski (1982) analyzes the impact of advertising expenditures onthe return on investment and concludes that increases as well as decreases in advertisingneither lead to a major loss nor an increase in profits. Biel and King (1990) find that a modestincrease in advertising has about the same negative impact on ROI as a decrease inadvertising. A more recent study from Frankenberger and Graham (2003) investigates theeffects of advertising expenditures on earnings under normal economic conditions andcompares them with the effects of decreased and increased advertising expenditures duringrecessionary periods. The authors concentrate on consumer products, industrial products andservices firms and find that the latter show no benefit from increased advertising spendingwhile the others do benefit due to an increase in short-term and long-term earnings. They alsodemonstrate that firms, which reduce advertising in a recession, maintain their status quobecause they are carried through by past advertising efforts as long as they survive. 13
  • Overall, the results in this section are not consistent enough to provide clear recommendationson how to deal with advertising expenditures in a recession. Sales and market share are likelyto be positively affected by an increase of advertising, yet financial measures, such as ROI orearnings, do not necessarily move upwards. Furthermore, most of the studies evaluateadvertising based on its short-term effects. Earlier, it was explained that firm investmentsshould be evaluated based on their contribution to long-term shareholder value. In particular,marketing expenditures should be evaluated based on their contribution to market-basedassets (Srivastava et al, 1998). To the author’s knowledge this has not been done withrecessionary advertising expenditures so far. The current paper aims to close this gap in orderto better advise managers on how to adjust their advertising budget in a recession. To do that,advertising expenditures are related to the market-based asset that is mainly created andmaintained by advertising efforts, the firm’s brand value.3. HypothesesAfter having reviewed literature on market-based assets in section 1.2., it should be clear howimportant advertising is as a source of brand equity and brand equity as a contributor to totalfirm value. So far, no study exists that examines the relation between advertising and brandequity in a recession. Hence, it is rather difficult for marketers to justify why they shouldmaintain or even increase their budgets in periods when most of the other functions cut backtheir costs. Although some firms might not have the financial resources to maintain or evenincrease their budgets in a recession, it is questionable whether the general trend to reduceadvertising expenditures can be justified. Managers might defend their decisions based on thetwo arguments mentioned earlier: First, by cutting marketing expenditures short-termprofitability can be increased. Second, if competitors cut their advertising one can do thesame because the market position would be maintained. As it is shown earlier, thosearguments are not necessarily correct (in terms of ROI, advertising decreasers are not betteroff than advertising increasers; in terms of sales, market share and earnings, advertisingincreasers do benefit) and only reflect a short-term orientation that is not in line with the long-term shareholder value orientation that companies should apply.Analyzing the relation between recessionary advertising and brand equity should providedeeper insights on how to adjust the advertising budget in a recession. Prior researchersconfirm a positive relation between advertising and brand equity during non-recessionaryperiods (e.g. Wang et al., 2008). Whether the relation is also positive during recessions still 14
  • needs to be tested. This is done the means of the following hypothesis:H1: The relation between recessionary advertising and brand equity is positive.A confirmation of the hypothesis would mean that an increase of recessionary advertisingwould be value enhancing, and a decrease of recessionary advertising would be valuedestroying. This finding alone might, however, not be strong enough to provide arecommendation on how to adjust the advertising budget in a recession. A more solidsuggestion could be provided if it could be proven that the effects of advertising on brandequity are stronger during a recession than during an expansion. In that case, firms shouldtruly consider to at least maintain or even increase their recessionary advertising budgets.Based on the fact that competitive advertising is generally reduced during economicdownturns, the previously reviewed studies reveal that advertising is more effective duringrecessions than during expansions with respect to sales, market share (Biel and King, 1990;Kijewski, 1982) and earnings (Frankenberger and Graham, 2003). It can be expected that thisis also true with respect to brand equity. By the means of the following hypothesis, this can betested.H2: The relation between advertising and brand equity is stronger during a recession than during an expansion.A graphical representation of the hypotheses is shown in Figure 2. The left hand sidevisualizes the expected positive relation (indicated by the plus signs) between recessionaryadvertising and brand equity (hypothesis 1). The right hand side visualizes hypothesis 2. Thethickness of the arrows indicates that the relation between advertising and brand equity isexpected to be stronger during a recession than during an expansion.Figure 2. Hypotheses 15
  • III. Data and MethodologyThis chapter presents the methodology used to test the two hypotheses. First, the differentvariables and data sources are discussed followed by a presentation of the final dataset. Next,the regression model applied for this research is introduced.1. AdvertisingAs discussed earlier, many researchers relate expenditures of advertising to differentperformance measures in order to analyze the effectiveness of advertising. Hence, advertisingexpenditures seem to be a good measure to quantify the advertising efforts of firms.Advertising expenditure data is obtained from the Standard & Poor’s Compustat NorthAmerica database which provides U.S. and Canadian market information on more than24,000 active and inactive publicly held companies. Compustat is considered the mostreliable source of corporate financial data available (Kamber, 2002) and it is widely used byacademic researchers. The previously mentioned studies by Chauvin and Hirschey (1993),Frankenberger and Graham (2003), Graham and Frankenerberger (2000), Kamber (2002) andMiller and Mathisen (2008) do, for example, rely on Compustat data. The yearly advertisingexpenditures available from the database represent the cost of advertising media (i.e., radio,television, and periodicals) and promotional expenses. This study is mainly interested in theeffects of changes in advertising expenditures. Therefore, not absolute advertisingexpenditures are used in the analysis but the percentage change of advertising from one yearto another. As it is shown later, those changes are regressed on changes in brand equity by themeans of multiple regression analysis.2. Brand EquityBrand equity is an intangible asset that is not consistently recognized in the financialstatements of firms. This has three reasons. First, US GAAP does not require the reporting ofinternally developed brands. Second, only acquired brands have to be recognized andamortized against net income over the brand’s estimated life. Third, changes in brand valuesare largely unaccounted for, even for brands recognized as assets (Barth, Clement, Foster, andKaszkik, 1998). Due to the lack of brand equity information in the financial statements, it isnot possible to retrieve brand values from the Compustat database. Fortunately, a few firms(e.g. MillwardBrown, BBDO Consulting, Interbrand) are specialized in the evaluation ofbrands and make their estimates publicly available. The 100 Best Global Brands rankings 16
  • from Interbrand make up the largest3 available dataset of such data. Brand values are,therefore, retrieved from these rankings.3. Other VariablesOther factors, such as the remaining components of the marketing mix, also have an impacton brand equity (Srivastava et al., 1998). Hence, they should be controlled for in theregression analysis. However, due to data availability constraints as well as for practicalreasons, those components are excluded from the present analysis. Additional variables,which are considered in the regression analysis, are described in the following.3.1. Three-Year Advertising GrowthWang, Zhang, and Ouyang, (2008) find that the effects of advertising on brand equity aresustainable and accumulative. Hence, the advertising efforts of previous periods are likely toaffect future brand equity growth as well. Therefore, a variable explaining three-yearadvertising growth prior to the year of interest is included in the regression analysis.3.2. Industry SectorThe most recent Best Global Brands report from Interbrand (Interbrand, 2010) shows thatthere are large differences of brand equity growth across industries. For example, the BestGlobal Brands from the financial services sector experienced a -5% (-40%) brand valuedecline in 2008 (2009), while the average brand value of the Fast Moving Consumer Goodssector increased by 4% (12%) in 2008 (2009). Hence, there seems to be a relation betweenbrand equity growth and a company’s industry belonging. To avoid bias in the results,industry effects are accounted for by adding industry dummies (based on two-digit StandardIndustry Classification codes) to the regression model.4. DatasetTo obtain a suitable sample for the present analysis Interbrand data is merged with Compustatdata. The following points discuss the factors that determine the size of the final sample. - Data from Interbrand constrains the sample to brands that were listed as one of the 100 Best Global Brands since the year 2001.3 The brand value rankings from Interbrand last back until the year 2001. Therewith, it is the largest publiclyavailable dataset to the knowledge of the author. 17
  • - Compustat provides advertising data for companies and not the individual brands of companies. This further limits the sample to corporate brands. - Data on advertising expenditures is only provided for firms that voluntarily publish how much they spend on advertising and that are listed on North American stock exchanges.The time period used in the present analysis further constrains the sample. For the recessionperiod, the most recent economic recession in the US is chosen. Only shortly before thecompletion of this study, the National Bureau of Economic Research announced that the mostrecent recession lasted from December 2007 until June 2009 (NBER, 2010). During thatperiod real GDP declined in the first, third and fourth quarter of the year 2008 and in the firstand second quarter of the year 2009 (see appendix, exhibit 1.1). With a duration of 18 monthsit was the longest recession since World War II (NBER, 2010). Since advertising, as well asbrand value data is only available on a yearly rather than on a monthly basis, it would berelatively difficult to account for advertising effects in December 2007 and during the firsttwo quarters of the year 2009. Hence, it is decided to not investigate the entire recessionperiod but to focus on the year 2008 as the recession year (i.e. January 2008 – December2008). To determine the effects of advertising during an expansion a period is chosen thatexperienced relatively high growth in real GDP. Furthermore, it is considered that the timeinterval between recession and expansion is small. Based on these criteria the year 2005(GDP grew by a about 3% from 2004 to 2005, see appendix, exhibit 1.2) is chosen as theexpansion year.The final sample consists of 32 corporate US brands (see appendix, exhibit 2). The readershould be aware that this number is larger than the number of brands available in any oneyear. This is due to the fact that a brand listed on the Best Global Brand list in one year mightnot be listed in the year after.5. Regression ModelingThe study at hand aims to analyze the relationship between a response variable (change inbrand value) and some independent variables (change in advertising, prior advertising growth,and industry dummies). A powerful procedure to analyze relationships between a dependentand independent variable is regression analysis (e.g. Malhotra, 2007; Pallant, 2007). Itdetermines whether the independent variable can explain a significant variation in the 18
  • dependent variable as well as how much of this variation can be explained. Furthermore, itallows to control for additional independent variables. Two multiple regressions are run inthis study; one to determine the strength of advertising effects on brand value in a recession;and another to determine the same effects during a non-recession period. A comparison of theregression results is expected to provide insights on how to adjust the advertising budget in arecession.Based on the discussion in this chapter the following regression equation is set up to analyzethe relationship between changes in advertising and changes in brand value: Change in Brand Equity = a + β1* Change in Advertising + β2* Prior Three-Year Advertising Growth + β3* Industry dummies + errorTo test hypothesis I, the following regression model (Model 1) is derived from the equation: BE0708 = a + β1* Adv0708 + β2* Adv0407 + β3* Industry dummies + εA second regression model (Model 2) tests hypothesis II. This model investigates the non-recessionary advertising effects on brand equity: BE0405 = a + β1* Adv0405 + β2* Adv0104 + β3* Industry dummies + ε 19
  • IV. Analysis and ResultsThis chapter presents the empirical results. To get an overview of the data and to betterunderstand the relationships underlying the analysis, descriptive statistics are discussed in thefirst part of this chapter. After that, preliminary findings based on bivariate correlations arepresented. The last part provides a first discussion of the regression results.1. Descriptive Statistics1.1. AdvertisingFigure 3. Average percentage change in advertising expenditures for the years 2004-2005,2005-2006, 2006-2007, 2007-2008 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% -2.00% Adv0405 Adv0506 Adv0607 Adv0708 -4.00% Note: Figure 3 is based on mean value data from Exhibit 2.1.b Adv0405, Adv0506, Adv0607, Adv0708 stand for the percentage change of advertising from one year to another. For example, the Adv0405 bar shows that the average firm spent almost 12% more on advertising in 2005 than in 2004.The literature review illustrates that companies usually decreased their advertisingexpenditures during previous recessions. Figures from the marketing and advertisingResearch Company Nielsen indicate that firms also cut back on advertising during the 2008recession. Nielsen finds that U.S. advertising expenditures declined by almost $3.7 billion to atotal amount of $136.8 billion in the year 2008 (Nielsen, 2009). A recessionary downwardtrend of advertising can also be observed for the companies in the present sample. Figure 3demonstrates the average yearly percentage change of advertising expenditures between theyears 2004 and 2008 (see appendix, exhibit 2.1 for a complete overview of the descriptivestatistics on advertising data). During the non-recession years between 2004 and 2007, theaverage company increased its advertising every year. On the contrary, advertisingexpenditures were decreased during the 2008 recession period. By comparing these changeswith the yearly changes in GDP over that same time frame (see appendix, exhibit 1.2 forchanges in real GDP), one gets an idea of how companies adjust their advertising 20
  • expenditures in different economic situations. Advertising and GDP changes move in thesame direction for each of the years which indicates that the average company is likely to be aprocyclical advertising spender. In other words, the average company tends to increaseadvertising during an expansion and to decrease it during a recession.Exhibit 2.2 in the appendix shows the recessionary and non-recessionary advertising growthrates for the individual companies in the sample. It can be seen that Ford, Dell, Yahoo andOracle are typical procyclical advertising spenders. They all spent over 20% more onadvertising in 2005 than in 2004, and they decreased their spending by more than 14% from2007 to 2008. While most of the firms cut back on advertising or maintained their level, somefirms spent a lot more. Visa (41%) and Amazon (27%), for example, invested heavily in theiradvertising campaigns during the year 2008. In absolute terms, Ford was the firm thatinvested the most in advertising. The car manufacturer spent about $4.6 billion during therecession year and $5.4 billion during the expansion year. Accenture, for example, spent farless money on advertising. In 2005 the consulting firm invested about $66 million in itsadvertising campaigns; in 2008 it was about $91 million.1.2. Brand EquityThe average brand value was between $14.8 billion (in 2005) and $17.1 billion (in 2008)during the analyzed period. (see appendix, exhibit 2.3 for a complete overview of descriptivestatistics on brand equity data). Earlier, it was illustrated that brand value often accounts for alarge part of overall firm value. In an attempt to check how much of the market value is madeup by brand value for the firms used in the present analysis, brand-to-market value ratios(BE/MV) are calculated for all brands for which sufficient data is available (see Table 1).50% of the companies have brand values that represent more than one third of their overallvalue. The three firms with the largest ratios are Harley Davidson, Tiffany and Co and Ford.With ratios of more than 75%, these firms derive the majority of firm value from their brands.Although the second column in Table 1 shows corporate brands with smaller BE/MV ratios,it can be concluded that brand value generally makes up a significant value component for thecompanies in the sample.The brand value estimates and brand value changes for the individual companies are shown inexhibit 2.4 in the appendix. The firms that experienced the largest brand value increase duringthe recession year were Apple and Google. Google’s brand value rose by about 30%, while 21
  • Apple was the closest follower with an increase of almost 20%. On the contrary, Ford (-13.75%) and GAP (-25.80%) experienced the greatest decline during that period. In absoluteterms, Coca Cola ($66.7 billion) was the most valuable brand. IBM and Microsoft closelyfollowed with brand values of about $59 billion. Starbucks, Motorola and Visa were situatedat the bottom of the brand value ranking with values between $3 billion and $4 billion.Table 1. Brand-to-market value ratios 2008 Rank Corporate Brand BE/MV 2008 Rank Corporate Brand BE/MV 2008 1 Harley Davidson 100% 15 Intel 29% 2 Tiffany & Co 90% 16 Ebay 26% 3 Ford 76% 17 Microsoft 25% 4 Coca Cola 55% 18 Motorola 23% 5 Disney 54% 19 Amazon 23% 6 Kellogs 51% 20 Hewlett-Packard 22% 7 McDonalds 47% 21 Yahoo 20% 8 Heinz 46% 22 Google 19% 9 IBM 40% 23 Colgate 18% 10 Starbucks 37% 24 Oracle 14% 11 GAP 36% 25 Pepsi 13% 12 Accenture 36% 26 Apple 12% 13 Avon 35% 27 JP Morgan 8% 14 DELL 31% 28 VISA 6%2. Preliminary AnalysisCompanies that increase their advertising in a recession are expected to benefit more in termsof brand equity than companies that decrease their advertising efforts. Figure 4 shows howthe recessionary advertising decision affects the future brand value for advertising increasersand decreasers. For the construction of this chart yearly brand value changes are calculatedfor each of the companies and are then averaged for the years 2008, 2009 and 2010. The darkgrey bar illustrates the average brand value change for advertising decreasers. The bright greybar demonstrates the average brand value change for advertising increasers. As expected, theincreaser group experiences rising brand values in the recession year while the brands ofdecreasers become less valuable. In 2009, both groups report an average decline. This can beexplained by the fact that the recession went through its trough in the first months of that year(NBER, 2010). Interesting to see is that the increaser group is again slightly better off. In2010, brand values grew again for both groups with the strongest boost for the increasers.Overall, the figure provides some first insights on how brand values change for advertisingincreasers and decreasers in different economic situations. It becomes clear that recessionary 22
  • advertising increasers are the ones that benefited the most during and after the recession of2008.Figure 4. Brand value change (in %) for adv. increasers and decreasers in 2008, 2009 & 2010 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% BE0708 BE0809 BE0910 -2.00% -4.00% -6.00% Decreasers Series1 Increasers Series2Another way to analyze the relationship between changes in advertising expenditures andchanges in brand value is to calculate the bivariate correlations between the two variables.Hereby, it is assessed to which degree changes of advertising are associated with similarchanges in brand equity. Instead of dividing the data set into two distinct groups, this form ofanalysis compares changes in advertising expenditures and changes in brand value for everysingle company. The second column in Table 2 shows the correlation coefficient for therelation between changes in advertising and changes in brand equity in the recession year.The statistically significant and positive figure indicates that a higher growth (decline) inrecessionary advertising is likely to result in a higher growth (decline) in brand value. Thetwo additional correlation coefficients in the third and fourth column are calculated to checkwhether advertising increasers also remain to be better off, in terms of brand equity, in thetime after the recession. Those coefficients are, however, not significant. It is, therefore, notpossible to say anything about the success of a recessionary advertising strategy beyond therecession period.Table 2. Pearson Correlations: Change in advertising versus change in brand value BE0708 BE0709 BE0710 Adv0708 .539** .209 .103** Significant at the 0.05 level 23
  • 3. Regression AnalysisMultiple regression analysis, compared to bivariate correlation analysis, has the advantage toaccount for the effects of other variables that also might have an influence on the dependentvariable. Hence, the regression equations introduced earlier, can provide deeper insights intothe relation between recessionary advertising and brand equity than the preliminary analysisin the previous section. Before running the two regressions, the explanatory power of themodels is checked for.3.1. Pre-TestsTo justify the use of linear regression models and to ensure the accuracy of their results, theanalyzed data has to meet certain criteria. In particular, it is assumed that the residuals(differences between the obtained and predicted dependent variable scores), which aregenerated as part of the regression analysis, are normally distributed, linear, independent andhave a constant variance. To check weather those assumptions are true, the residual scatterplots, histograms (see appendix, exhibit 3.1 and 3.2) and Durbin-Watson statistics areexamined. The histograms show that the error terms are relatively normally distributed. Therandom pattern of the scatter plots indicates that the residuals are linear and have a constantvariance. The Durbin-Watson statistics presented in the “model-summary” table in exhibit 4.1and 4.2 (see appendix) confirm that the independence assumption is also not violated.To determine the utility of a regression model one needs to look at the adjusted R-squarescores in the ‘model summary’ and the F-Statistics in the ‘ANOVA’ table (see appendix,exhibit 4.1 and 4.2). The adjusted R-square scores are 0.584 and 0.727. This means that theindependent variables are explaining a relatively high variation in the dependent variable. TheF-statistics show that both models are statistically significant at the 5 percent level. Overallthose results suggest that both models are well suited to analyze the relation between theindependent and dependent variables.After having checked the regression assumptions and the appropriateness of the overall modelthe variance inflation factors (VIF scores) are examined to make sure that multicollinearity isnot a problem. Although multicollinearity does not reduce the explanatory power or reliabilityof a regression model as a whole, it may bias the coefficients of the independent variables.Since the VIF scores, presented in the collinearity statistics column in exhibit 5.1 and 5.2 (seeappendix), are far below 10, multicollinearity is not a problem. 24
  • 3.2. ResultsModel 1 is used to test the first hypothesis and the results are presented in Table 3 (seeappendix, exhibit 5.1 for the complete output). The most important figure in this table is theunstandardized coefficient for the Adv0708 variable (0.517). Since it is positive andstatistically significant at the 5 percent significance level, it can be concluded that an increase(decrease) of advertising in the year 2008 is associated with an increase (decrease) of brandequity in that same year.Table 3. Results, Model 1. Dependent variable BE0708 Unstandardized Standardized Variable Coefficients Coefficients Sig. B Beta Adv0708 ,517 ,570 ** Adv0407 ,071 ,205Note: Industry dummies are excluded from this table. For a complete overviewof the results, see appendix, exhibit 5.1.** Significant at the 0.05 levelThe unstandardized coefficient column in Table 3 shows how much the dependent variable(BE0708) is expected to change if the independent variable (Adv0708) changes by one unit.So, if Adv0708 increases by 1%, BE0708 rises by 0.517%. By the means of the followingexample this can be put into dollar terms. As presented in exhibit 2.1 and exhibit 2.3 in theappendix, the average firm spent around $1.04 billion on advertising in the pre-recession year(2007) and had a brand value of $15.6 billion. It means that a 1% increase of advertisingexpenditures would cost $10.40 million (1.04 x 0.01) and correspond to a brand value boostof $80.65 (15.6 x 0.00517) million. Hence, increasing advertising by just 1% can have atremendous positive impact on the brand value of a firm. If one considers that a firm’s brandoften makes up a significant part of overall firm value it becomes clear how important it is toinvest in advertising. Overall, the results in this subsection strongly support the expectationthat the relation between recessionary advertising and brand equity is positive. Hence,hypothesis I can be confirmed.To test whether firms can more effectively advertise during a recession than during anexpansion (in terms of brand equity growth), one needs to find out whether the relationbetween advertising and brand equity differs across the two periods. By the means of Model2 this can be tested. The results are presented in Table 4. The change in advertising 25
  • expenditure variable is again significant and positive (0.287). When comparing this outcomewith the outcome of the first regression it can be seen that the unstandardized coefficient ofthe Adv0405 variable is about half as big as the one from the Adv0708 variable. This impliesthat an increase of advertising during a recession has an impact on brand value that is twotimes stronger than the impact of an advertising increase during a non-recession period.Table 4. Results, Model 2. Dependent variable BE0405 Unstandardized Standardized Model Coefficients Coefficients Sig. B Beta Adv0405 ,287 ,800 *** Adv0104 ,094 ,651 ***Note: Industry dummies are excluded from this table. For a complete overviewof the results, see appendix, exhibit 5.2.*** Significant at the 0.01 levelIn order to illustrate the strength of recessionary advertising, the regression results are againexpressed in monetary terms. Earlier it is illustrated that a 1% increase of recessionaryadvertising would cost an average of $10.40 million and correspond to a brand value boost of$80.65 million. During the non-recession period (between 2004 and 2005) the average brandvalue change corresponding to a 1% change in advertising is far less. As presented in exhibit2.1 and exhibit 2.3 in the appendix, the average firm spent about $0.95 billion on advertisingin the year 2004 and had a brand value of $14.9 billion. Hence, a 1% increase of advertisingwould cost $9.5 million (0.95 x 0.01) and the average brand value would consequently go upby $42.8 million (14.9 x 0.00287). The bar chart in Figure 5 illustrates both scenarios. Themain message to be derived from that chart is that advertising is a lot more effective during arecession than during an expansion. Overall, the regression results confirm hypothesis II.The prior advertising variable Adv0104 in Table 4 provides some additional information. Itindicates that a 1% increase of prior advertising during an expansion leads to an increase of0.094% in brand value. Hence, during expansion periods one can rely on prior advertisingefforts. The Adv0407 variable in Table 3 is not significant and, therefore, it is not possiblesay anything about the effects of prior advertising during recessions. 26
  • Figure 5. Average Advertising and Brand Value growth (in million US$) during a recessionand expansion (when advertising increases by 1%). $100.00 $80.00 $60.00 $40.00 $20.00 $0.00 Expansion Recession Advertising Brand Equity 27
  • V. DiscussionThe previous chapter starts off with a preliminary analysis (correlation analysis) that findsfirst evidence for a positive relation between changes in advertising and changes in brandvalue. The two-variable model, however, explains very little about the ability of one variableto predict the other (Kamber, 2002), and it ignores the effects of other factors that also mighthave an effect on a firm’s brand equity. Therefore, multivariate regressions (Model 1 andModel 2) are conducted. They incorporate a prior three-year advertising growth variable andcontrol for industry effects at the same time. The empirical evidence confirms the expectationthat advertising has a positive impact on brand equity and that this impact is stronger during arecession than during an expansion. Keeping in mind that the effects of advertising onmarket-based assets are sustainable and accumulative (Wang et al., 2008) it becomes clearhow valuable it is, in terms of brand value growth, to increase advertising expenditures in arecession.The fact that advertising is more effective during recessions than during expansions seems tobe related to the company’s cost cutting behavior during recessions. When economists studystrategic situations, or ‘games’, in which the outcome of one decision is directly dependent onthe choices of others, they call it game theory. What has been done in the study at hand is ananalysis of the advertising ‘game’ that is played by US firms in a recession. It is assumed thatadvertising increasers only win this game (in terms of brand value growth) because most ofthe other companies decrease their advertising. In case the majority of firms would suddenlystart to spend more on advertising in future recessions, the relation between advertising andbrand equity is likely to change. Taking into account that other researchers also recommend toincrease advertising expenditures in a recession (e.g. Frankenberger and Graham, 2003), itcan be expected that firms are actually going to do so in the future. The results of this studyshould, therefore, be taken with some degree of caution. Based on historical data it was foundthat recessionary advertising increasers are better off (in terms of brand value) thanadvertising decreasers. Whether this remains to be true in future recessions strongly dependson the aggregate advertising behavior of companies.1. Managerial ImplicationsMarketing managers are confronted with a difficult dilemma in recessionary periods. On theone hand, they feel the pressure to reduce costs, by for example, cutting their advertisingbudgets. On the other hand, they are advised to increase their advertising in order to benefit in 28
  • terms of sales & market share (Biel and King, 1990; Kijewski, 1982), earnings(Frankenberger and Graham, 2003) and brand value. How should managers deal with thisdilemma? Of course managers cannot simply increase their advertising budget if major lossesor even bankruptcy is at risk. Hence, it is crucial to first check whether a firm has thefinancial resources to spend more on advertising. If that is the case, managers should carefullyexamine the advertising behavior of their competitors. The current study shows that duringeconomic situations in which the majority of firms decrease their advertising (i.e. during arecession), an increase can be a very effective move. Hence, if the majority of competitorsdecrease their advertising efforts in a recession, a company should not miss the opportunity toincrease their advertising spending. Brand equity, which accounts for a large part ofintangible firm value (PricewaterhouseCoopers and Sattler, 2005), is likely to increase, andthis would be highly valued by the shareholders of a company (Barth, et al., 1998; Kerin andSethuraman, 1998; Wang et al., 2008). Hence, it is proven that recessionary advertising has apositive and strong impact on the value of a firm. Managers can, therefore, justify an increaseof recessionary advertising with the argument to operate in the best interest of the firm’sshareholders.2. Theoretical ImplicationsThe “accountability of marketing expenditures” is one of the major research priorities of theMarketing Science Institute (MSI) for the years 2008-2010 (Marketing Science Institute,2010) and, therefore, it is of crucial importance to investigate the link between marketingactivities and the long-term value of a firm. During economic downturns, when cost cuttingpressure is very high, it is particularly difficult for marketers to justify their marketingexpenditures. An analysis of the relation between marketing and firm value during thosedownturns can, therefore, make significant contributions to the marketing literature. So far, afew researchers investigated the relation between recessionary advertising and sales, marketshare and earnings, and found that advertising increasers are often more successful thanadvertising decreasers. Furthermore, they observe that advertising efforts are more effectiveduring recessions than during expansions. Those studies do, however, ignore the effects ofadvertising on the value of a firm. The main contribution of this study is to establish the linkbetween recessionary advertising and the firm’s intangible firm value. 29
  • VI. Limitations and Future ResearchThe major limitation of the present study is the sample size. For the investigated time period,Compustat provides advertising expenditures for about 2800 firms, yet only 32 of thosevalues can be matched with brand value data from Interbrand’s 100 Best Global Brands lists.The small sample, consisting of companies with extremely high brand values is, therefore, notrepresentative for the entire population of US firms. The sample size further reduces thestatistical power of the present analysis. Hence, future research should gather more brandvalue estimates and repeat this study with a larger sample size.Other shortcomings concern the data itself. The brand values reported by Interbrand are onlyestimates and not perfect measures of brand equity. As stated earlier, they are calculated bythe economic use approach which is just one of many methods to derive brand valueestimates. Criticisms against this approach are “(1) the method for estimating future earningsand cash flows over and above the future earnings and cash flows that an unbranded productcan produce, (2) the choice of a discount rate based on seemingly subjective assessments ofbrand strength, and (3) the tendency to overlook asset synergies and brand or trademarkextension potential when valuing brands” (Kerin and Sethurman, 1998, p. 271). Nevertheless,according to Kerin and Sethurman as well as to other researchers, Interbrand’s brand valuesestimates are generally considered as very reliable. This justifies its use for the presentanalysis.The advertising data from Compustat also brings along some limitations. First of all, thisstudy only focuses on the amount of advertising spent and not on how effectively theadvertising dollars are used. Second, this study is constrained to traditional advertising efforts(television, radio, newspaper, magazines and billboards) and, thus, ignores the increasingexpenditures into new media channels, such as the Internet. In developed countries, Internetadvertising is on a rise at the expense of traditional media (The Economist, 2008). Hence, thereported decline of advertising expenditures in Figure 3 could partly be explained by the factthat only traditional advertising efforts are considered. This in turn would distort the results ofthis study. Therefore, future research should also account for expenditures into new media inorder to accurately reflect a firms advertising spending today. Such studies could furtherexamine whether online advertising is better able to resist recessions than traditionaladvertising. Since the effects of online advertising are easier to measure and thus to justify, itcan be expected that online advertising is better able to resist the cost-cutting pressure during 30
  • recessions (The Economist, 2008).Other shortcomings concern the industry dummies in the regression analysis. The problem isthat only a few firms represent one industry group. Hence, a dummy coefficient would tellsomething about the brand value growth of certain companies but nothing about the effects ofan entire industry. Nevertheless, all industry dummies are kept in the regression modelsbecause they capture additional information that cause an increase of the adjusted R squarescores. In other words, the incorporation of those dummies improves the overall model. Toaccurately account for industry effects in future research, the current study should be repeatedwith a larger sample that better represents the different industries.Another limitation considers the length of the recession period. As stated earlier, the analyzedrecession period began in December 2007 and ended in June 2009. Due to data availabilityconstraints it is not possible to consider the entire period in the analysis. In particular, theadvertising effects during the years 2007 and 2009 are excluded. If future researchers couldrepeat the present study with monthly rather than yearly advertising and brand value data,their results could better reflect the advertising brand value relation during a recession. 31
  • VII. ConclusionThe goal of this study was to find out how marketing managers should adjust their advertisingbudget during a recession. To answer this question it was important to first understand howadvertising affects a firm. A discussion of the different effectiveness measures revealed thatthere is an increasing need to evaluate marketing activities based on their contribution tomarket-based assets, and in particular, to brand equity. Therefore, it was decided to analyzethe relation between recessionary advertising and a firm’s brand equity. By the means ofregression analysis this relation was studied for a recession and a non-recession period. Acomparison of the results revealed that advertising has an impact on brand value that is twotimes stronger during a recession than during an expansion. Overall, this suggests that value-oriented marketing managers should see a recession as an opportunity rather than as a threat.They should consider to maintain or even to increase their advertising budget in a recession. 32
  • AppendixExhibit 1. US Real Gross Domestic Product1.1 Quarterly Growth, Real Gross Domestic Product, 2007 – 2009 Change in real GDP to Year Quarter previous quarter 2007q1 0.22% 2007q2 0.79% 2007q3 0.56% 2007q4 0.71% 2008q1 -0.18% 2008q2 0.15% 2008q3 -1.02% 2008q4 -1.77% 2009q1 -1.26% 2009q2 -0.18% 2009q3 0.39% 2009q4 1.22%Data retrieved 28th August from: http://www.bea.gov/national/index.htm#gdp1.2 Yearly Growth, Real Gross Domestic Product, 2005 – 2008 Change in real GDP to Year previous year 2005 3.05% 2006 2,67% 2007 1,95% 2008 -0.0008%Data retrieved 28th August from: http://www.bea.gov/national/index.htm#gdp 33
  • Exhibit 2. Descriptive Statistics2.1. Advertising Dataa) Absolute Advertising Expenditures Minimum Maximum Mean Std. Variable N (in million $) (in million $) (in million $) Deviation Adv04 30 37.70 3490 950.22 1005.43159 Adv05 30 65.90 5000 1066.51 1198.81271 Adv06 31 68.81 5100 1040.85 1110.45272 Adv07 31 76.90 5400 1035.31 1113.88475 Adv08 31 71.00 4600 1009.58 1033.91448b) Changes in Advertising ExpendituresVariable N Minimum Maximum Mean Std. DeviationAdv04/05 30 -.64 .64 .1140 .21222Adv05/06 30 -.35 .45 .0545 .17356Adv06/07 30 -.38 .32 .0533 .15359Adv07/08 31 -.39 .41 -.0085 .15044 34
  • 2.2 Absolute advertising expenditures (in million US$) and changes in advertisingexpenditures for the years 2005 and 2008 Change in Change in Adv. Adv. Adv. Adv. Company Expenditure Expenditure Expenditure Expenditure 08 05 (07/08) (04/05) 1 VISA 41.48% 588 2 Amazon 27.14% 16.07% 420 168 3 Starbucks 19.77% 22.12% 129 88 4 Harley Davidson 13.79% 26.62% 89 67 5 Google 11.15% 63.85% 266 104 6 Disney 10.34% -3.45% 2,900 2,900 7 Tiffany & Co 8.17% 1.87% 189 138 8 Coca Cola 7.47% 12.00% 2,998 2,500 9 Colgate 6.29% 10.94% 1,650 1,194 10 Avon 5.66% -1.47% 391 136 11 Kraft 5.19% 4.26% 1,639 1,314 12 Apple 3.91% 28.22% 486 287 13 IBM 1.35% -3.97% 1,259 1,284 14 Kellogs 1.21% 6.00% 1,076 858 15 McDonalds -2.12% 6.33% 703 771 16 Intel -2.15% 19.23% 1,860 2,600 17 Accenture -3.70% 6.02% 91 66 18 Pepsi -5.56% 5.56% 1,800 1,800 19 Hertz -6.31% 0.55% 163 165 20 Heinz -7.37% 2.53% 316 297 21 JP Morgan -8.21% 30.36% 1,913 1,917 22 Ebay -8.30% 30.91% 923 665 23 GAP -9.43% -2.92% 435 513 24 Hewlett-Packard -10.00% -63.64% 1,000 1,100 25 Microsoft -10.83% 9.15% 1,200 995 26 Kodak -12.57% -4.69% 350 490 27 Oracle -14.08% 37.26% 71 106 28 Yahoo -15.79% 20.40% 190 201 29 DELL -16.28% 25.49% 811 773 30 Ford -17.39% 36.00% 4,600 5,000 31 Motorola -39.24% 790 32 Pfizer 0.29% 3,500 thData retrieved 15 August from: https://wrds-web-wharton-upenn-edu.ezproxy.ub.unimaas.nl/wrds/ 35
  • 2.3 Descriptive Statistics – Brand Equity Dataa) Absolute Brand Values Minimum Maximum Mean Variable N Std. Deviation (in million $) (in million $) (in million $) BE04 30 2400 67394 14887.43 17411.877 BE05 31 2576 67525 14794.93 16987.370 BE06 30 3099 67000 15364.16 16920.079 BE07 30 3026 65324 15597.26 17110.883 BE08 28 3338 66667 17127.53 17860.307b) Changes in Brand Values Variable N Minimum Maximum Mean Std. Deviation BE04/05 30 -.11 .18 .0270 .06802 BE05/06 30 -.28 .32 .0249 .11967 BE06/07 29 -.23 .31 .0266 .10720 BE07/08 27 -.26 .30 .0257 .10630 36
  • 2.4 Absolute brand values (in billion US$) and changes in brand values for the years 2005 and2008 Change in Change in Brand Brand Brand Company Brand Value Value Value 08 Value 05 (07/08) (04/05) 1 Google 30.30% 25,590 8,461 2 Apple 19.58% 13.95% 13,724 7,985 3 Amazon 15.90% 2.17% 6,434 4,248 4 Oracle 10.00% -0.44% 13,831 10,887 5 Accenture 8.20% 6.02% 7,948 6,142 6 Ebay 6.70% 17.56% 7,991 5,701 7 Colgate 6.40% 4.96% 6,437 5,186 8 Starbucks 6.39% 6.83% 3,879 2,576 9 Hewlett-Packard 5.58% -11.19% 23,509 18,866 10 McDonalds 5.32% 3.89% 31,049 26,014 11 Tiffany & Co 4.87% -0.55% 4,208 3,618 12 Kellogs 3.80% 3.33% 9,710 8,306 13 IBM 3.29% -0.78% 59,031 53,376 14 Avon 3.06% 6.98% 5,264 5,213 15 Pepsi 2.72% 2.69% 13,249 12,399 16 Coca Cola 2.01% 0.19% 66,667 67,525 17 Heinz 1.53% -1.36% 6,646 6,932 18 DELL 1.21% 13.08% 11,695 13,231 19 Intel 0.98% 5.87% 31,261 35,588 20 Microsoft 0.51% -2.39% 59,007 59,941 21 Disney 0.14% -2.54% 29,251 26,441 22 Harley Davidson -1.43% 3.93% 7,609 7,346 23 JP Morgan -6.13% -3.46% 10,773 9,455 24 Yahoo -10.39% 13.53% 5,496 5,256 25 Motorola -11.50% 10.16% 3,721 3,877 26 Ford -13.75% -10.00% 7,896 13,159 27 GAP -25.80% 3.93% 4,357 8,195 28 Kodak -5.06% 4,979 29 Hertz 3.12% 3,521 30 Kraft 2.97% 4,238 31 Pfizer -6.55% 9,981 32 VISA 3,338Data retrieved 26th August from: http://www.interbrand.com/en/best-global-brands/best-global-brands-2005/best-global-brands-2005.aspx, http://www.interbrand.com/en/best-global-brands/best-global-brands-2008/best-global-brands-2008.aspx 37
  • Exhibit 3. Residual Analysis3.1. Histogram and scatterplot of residuals for the recession model (Model 1)3.2. Histogram and scatterplot for the non-recession model (Model 2) 38
  • Exhibit 4. Model Utility4.1. Model Summary & ANOVA table (Model 1) Model Summaryb Adjusted R Std. Error of the Durbin-Model R R Square Square Estimate Watson 1 ,895a ,800 ,584 ,0674552 2,929a. Predictors: (Constant), 87, 73, 60, 56, 48, 59, 58, 37, 28, 35, 20, Adv0407, Adv0708b. Dependent Variable: BE0708 ANOVAb Model Sum of Squares df Mean Square F Sig.1 Regression ,219 13 ,017 3,696 ,015a Residual ,055 12 ,005 Total ,273 25a. Predictors: (Constant), 87, 73, 60, 56, 48, 59, 58, 37, 28, 35, 20, Adv0407, Adv0708b. Dependent Variable: BE07084.2. Model Summary & ANOVA table (Model 2) Model Summaryb Adjusted R Std. Error of the Durbin-Model R R Square Square Estimate Watson 1 ,924a ,853 ,727 ,0363126 2,464a. Predictors: (Constant), 87, 73, 60, 56, 48, 59, 58, 37, 28, 35, 20, Adv0104, Adv0405b. Dependent Variable: BE0405 ANOVAb Model Sum of Squares df Mean Square F Sig. 1 Regression ,107 12 ,009 6,775 ,001a Residual ,018 14 ,001 Total ,126 26a. Predictors: (Constant), 87, 73, 60, 56, 48, 59, 58, 37, 28, 35, 20, Adv0104, Adv0405b. Dependent Variable: BE0405 39
  • Exhibit 5. Coefficient Tables5.1. Coefficient Table (Model 1) Unstandardized Standardized Collinearity Model Coefficients Coefficients t Sig. Statistics B Std. Error Beta Tolerance VIF (Constant) ,028 ,068 ,420 ,682 Adv0708 ,517 ,171 ,570 3,034 ,010 ,471 2,121 Adv0407 ,071 ,059 ,205 1,207 ,251 ,579 1,728 20 -,010 ,077 -,036 -,133 ,897 ,226 4,421 28 -,045 ,088 -,118 -,514 ,617 ,315 3,176 35 ,091 ,080 ,282 1,134 ,279 ,269 3,722 37 -,123 ,087 -,319 -1,401 ,187 ,322 3,106 48 -,070 ,098 -,131 -,710 ,491 ,493 2,030 56 -,230 ,096 -,431 -2,390 ,034 ,511 1,955 58 -,027 ,085 -,071 -,323 ,752 ,341 2,929 59 -,043 ,090 -,112 -,479 ,640 ,304 3,285 60 -,073 ,101 -,136 -,720 ,485 ,466 2,144 73 ,046 ,079 ,188 ,581 ,572 ,159 6,280 87 ,048 ,099 ,091 ,486 ,636 ,480 2,084 40
  • 5.2. Coefficient Table (Model 2) Unstandardized Standardized Collinearity Model Coefficients Coefficients t Sig. Statistics B Std. Error Beta Tolerance VIF (Constant) -,006 ,021 -,301 ,768 Adv0405 ,287 ,043 ,800 6,698 ,000 ,735 1,360 Adv0204 ,094 ,022 ,651 4,300 ,001 ,458 2,186 20 ,003 ,027 ,017 ,113 ,912 ,460 2,175 28 -,016 ,030 -,075 -,537 ,600 ,540 1,852 35 ,051 ,030 ,237 1,715 ,108 ,551 1,816 37 -,200 ,044 -,554 -4,548 ,000 ,708 1,412 56 ,035 ,042 ,098 ,838 ,416 ,770 1,298 58 -,016 ,034 -,061 -,467 ,648 ,609 1,642 59 -,040 ,034 -,153 -1,187 ,255 ,628 1,592 60 -,167 ,045 -,463 -3,720 ,002 ,679 1,474 73 ,021 ,027 ,118 ,754 ,463 ,431 2,320 87 ,183 ,053 ,506 3,458 ,004 ,490 2,039 41
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