marketing finance interface
DESCRIPTION
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.TRANSCRIPT
Marketing-Finance Interface
Prof. Ashwin Malshe
September 6, 2011
To
IIM-A PGPX
207/04/2023 Marketing-Finance Interface
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
307/04/2023
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
407/04/2023 Titre de la présentation
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
507/04/2023 Marketing-Finance Interface
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
607/04/2023 Marketing-Finance Interface
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
707/04/2023 Marketing-Finance Interface
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
807/04/2023 Marketing-Finance Interface
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)
907/04/2023 Marketing-Finance Interface
Focus of My Talk Today
● Advertising and firm value● Endogeneity of marketing strategy
1007/04/2023 Marketing-Finance Interface
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
1107/04/2023 Marketing-Finance Interface
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
1207/04/2023 Marketing-Finance Interface
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
1307/04/2023 Marketing-Finance Interface
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!