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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 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

  1. 1. Marketing-Finance Interface<br />Prof. Ashwin Malshe<br />September 6, 2011<br />To<br />IIM-A PGPX<br />
  2. 2. About Ashwin Malshe<br />PhD (Marketing), MMS (Marketing), BE (Electronics)<br />Seven years industry experience<br />Institutional sales<br />Analytics<br />With ESSEC since July 2011<br />Multiple research interests<br />Marketing strategy<br />Marketing-finance interface<br />Consumer behavior<br />Social media marketing<br />Blogging activities<br />Micro-Positioning<br />Flirting with Finance<br />2<br />05/09/2011<br />Marketing-Finance Interface<br />
  3. 3. Marketing Metrics<br />Measuring the impact of marketing strategies has been tough<br />Strategies by definition are long-term<br />Over a longer term many confounding effects can add noise<br />The outcome variables are not universally defined<br /><ul><li>Net sales/ gross sales
  4. 4. Number of customers
  5. 5. CLV
  6. 6. Profitability, etc.</li></ul>Rich research exists in marketing to measure marketing’s impact on traditional metrics<br />3<br />05/09/2011<br />Marketing-Finance Interface<br />
  7. 7. Traditional Metrics are not Sufficient<br />The top management is more concerned about stock prices<br />The link between existing metrics and stock prices is not obvious<br />Many existing metrics are subject to manipulation by the managers<br />Investors may not trust them<br /><ul><li>Groupon’s β€œAdjusted Consolidated Segment Operating Income”
  8. 8. Sales figures can be manipulated, e.g., channel stuffing</li></ul>Managers themselves may not trust them<br /><ul><li>Various social media marketing metrics</li></ul>4<br />05/09/2011<br />Titre de la prΓ©sentation<br />
  9. 9. Financial Market Metrics<br />Capital market metrics are, on average, difficult to manipulate in a well functioning financial market<br />Securities laws<br />Corporate governance<br />Shareholder activism<br />Arbitrageurs<br />In efficient markets, prices are unbiased estimates of the market participants’ expectations about future cash flows<br />Financial market metrics are superior to firm’s internal metrics<br />The price changes can be extremely fast<br />5<br />05/09/2011<br />Marketing-Finance Interface<br />
  10. 10. Marketing and Shareholder Value<br />πΉπ‘–π‘Ÿπ‘šΒ π‘‰π‘Žπ‘™π‘’π‘’= 𝐸(πΆπ‘Žπ‘ hΒ πΉπ‘™π‘œπ‘€π‘ )πΈπ‘…π‘Žπ‘‘π‘’Β π‘œπ‘“Β π‘…π‘’π‘‘π‘’π‘Ÿπ‘›βˆ’πΈ(πΊπ‘Ÿπ‘œπ‘€π‘‘hΒ π‘…π‘Žπ‘‘π‘’)<br />𝐸(βˆ™) operator denotes the expectations<br />How marketing affects<br />The magnitude of expected cash flows<br />The risk of the expected cash flows<br />The growth rate of the expected cash flows<br />Β <br />6<br />06/09/2011<br />Marketing-Finance Interface<br />
  11. 11. Marketing-Finance Interface<br />7<br />06/09/2011<br />Marketing-Finance Interface<br />Focus of the Extant Marketing Literature<br />Finance<br /><ul><li>Firm Value
  12. 12. Stock Returns
  13. 13. Systematic Risk
  14. 14. Idiosyncratic Risk
  15. 15. Liquidity Risk
  16. 16. Cost of Debt</li></ul>Marketing<br /><ul><li>Innovation
  17. 17. Brand Equity
  18. 18. Corporate Social Responsibility
  19. 19. Supply Chain Relations
  20. 20. Strategic Alliances
  21. 21. Customer Satisfaction</li></li></ul><li>Examples<br />Rao, Agarwal, and Dahlhoff (2004) study how manifest branding strategy affects firm value<br />Corporate branded firms have higher firm value on average<br />Firms with house-of-brands strategy faired less well<br />Luo and Bhattacharya (2006) argue that CSR leads to higher customer satisfaction, which in turn increases firm value<br />McAlister, Srinivasan, and Kim (2007) show that advertising and R&D intensities reduce firm’s CAPM β€œbeta”<br />R&D may actually increase a firm’s risk (Berk, Green, and Naik 1999; 2004)<br />8<br />05/09/2011<br />Marketing-Finance Interface<br />
  22. 22. Focus of My Talk Today<br />Advertising and firm value<br />Endogeneity of marketing strategy<br />9<br />06/09/2011<br />Marketing-Finance Interface<br />
  23. 23. Advertising and Liquidity Risk<br />Advertising creates value through multiple channels<br />Increased cash flow<br />Reduced market risk<br />Increased liquidity<br />Advertising can also reduce liquidity risk – the risk that a stock can’t be traded when market returns are low<br />Advertising increases individual investor awareness<br />Individual investors tend to be liquidity providers<br />The spillover effect due to advertising can be as high as 1.3% of shareholder value<br />10<br />06/09/2011<br />Marketing-Finance Interface<br />
  24. 24. My Research Focus<br />11<br />05/09/2011<br />Marketing-Finance Interface<br />Focus of the Extant Marketing Literature<br />Finance<br /><ul><li>Firm Value
  25. 25. Stock Returns
  26. 26. Systematic Risk
  27. 27. Idiosyncratic Risk
  28. 28. Liquidity Risk
  29. 29. Cost of Debt</li></ul>Marketing<br /><ul><li>Innovation
  30. 30. Brand Equity
  31. 31. Corporate Social Responsibility
  32. 32. Supply Chain Relations
  33. 33. Strategic Alliances</li></ul>Focus of My Research<br /><ul><li>Customer Satisfaction
  34. 34. Capital Structure</li></li></ul><li>Capital Structure and Satisfaction<br />Firms with more debt experience higher pressure to meet the interest payments<br />Limited flexibility (Fresard 2010)<br />Cost-cutting in long-term investments (Peyer and Shivdasani 2001)<br />Investments in intangible assets such as customer satisfaction are difficult to justify and therefore easy to cut under pressure<br />Cutting advertising for brand building<br />Reducing product and service quality (Maksimovic and Titman 1991; Matsa 2011)<br />Changing the pricing policy (Chevalier 1995)<br />Indebted firms are likely to invest less in customer satisfaction as it generates cash flows in the long term<br />12<br />06/09/2011<br />Marketing-Finance Interface<br />
  35. 35. Key Findings<br />Indebted firms have lower customer satisfaction on average<br />The negative relationship exists only for the firms that have fewer growth opportunities<br />Managers of low growth firms might be overinvesting in customer satisfaction<br />Debt acts as a disciplining mechanism<br />Higher customer satisfaction reduces firm value when the debt levels are higher<br />This indicates that using debt to reduce free cash flows is actually a value increasing strategy<br />13<br />06/09/2011<br />Marketing-Finance Interface<br />
  36. 36. Thank You!<br />