Marketing-Finance Interface

Prof. Ashwin Malshe

September 6, 2011

To

IIM-A PGPX

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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 activitiesMicro-Positioning

Flirting with Finance

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Marketing Metrics

● Measuring the impact of marketing strategies has been toughStrategies 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

Marketing-Finance Interface

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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 managersInvestors 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

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Financial Market Metrics

● Capital market metrics are, on average, difficult to manipulate in a well functioning financial marketSecurities laws

Corporate governance

Shareholder activism

Arbitrageurs

● In efficient markets, prices are unbiased estimates of the market participants’ expectations about future cash flowsFinancial market metrics are superior to firm’s internal metrics

The price changes can be extremely fast

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Marketing and Shareholder Value

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

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Marketing-Finance Interface

Marketing• Innovation• Brand Equity• Corporate Social

Responsibility• Supply Chain Relations• Strategic Alliances• Customer Satisfaction

Finance• Firm Value• Stock Returns• Systematic Risk• Idiosyncratic Risk• Liquidity Risk• Cost of Debt

Focus of the Extant Marketing Literature

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Examples

● Rao, Agarwal, and Dahlhoff (2004) study how manifest branding strategy affects firm valueCorporate 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)

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Focus of My Talk Today

● Advertising and firm value● Endogeneity of marketing strategy

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Advertising and Liquidity Risk

● Advertising creates value through multiple channelsIncreased 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 lowAdvertising 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

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My Research Focus

Marketing• Innovation• Brand Equity• Corporate Social

Responsibility• Supply Chain Relations• Strategic Alliances

Finance• Firm Value• Stock Returns• Systematic Risk• Idiosyncratic Risk• Liquidity Risk• Cost of Debt

Focus of the Extant Marketing Literature

Focus of My Research

• Capital Structure• Customer Satisfaction

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Capital Structure and Satisfaction

● Firms with more debt experience higher pressure to meet the interest paymentsLimited 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 pressureCutting 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

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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 opportunitiesManagers 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 higherThis indicates that using debt to reduce free cash flows is actually a value increasing

strategy

Thank You!