Marketing-Finance Interface

Prof. Ashwin Malshe

September 6, 2011
To
IIM-A PGPX
About Ashwin Malshe
PhD (Marketing), MMS (Marketing), BE (Electronics)
Seven years industry experience
Institutional sales
Analytics
With ESSEC since July 2011
Multiple research interests
Marketing strategy
Marketing-finance interface
Consumer behavior
Social media marketing
Blogging activities
Micro-Positioning
Flirting with Finance
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Marketing Metrics
Measuring the impact of marketing strategies has been tough
Strategies by definition are long-term
Over a longer term many confounding effects can add noise
The outcome variables are not universally defined
Net sales/ gross sales
Number of customers
CLV
Profitability, etc.

Rich research exists in marketing to measure marketings impact on
traditional metrics
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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 managers
Investors may not trust them
Groupons Adjusted Consolidated Segment Operating Income
Sales figures can be manipulated, e.g., channel stuffing
Managers themselves may not trust them
Various social media marketing metrics

4 05/09/2014 Titre de la prsentation
Financial Market Metrics
Capital market metrics are, on average, difficult to manipulate in a well
functioning financial market
Securities laws
Corporate governance
Shareholder activism
Arbitrageurs

In efficient markets, prices are unbiased estimates of the market participants
expectations about future cash flows
Financial market metrics are superior to firms 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
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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
Examples
Rao, Agarwal, and Dahlhoff (2004) study how manifest branding strategy
affects firm value
Corporate branded firms have higher firm value on average
Firms with house-of-brands strategy faired less well

Luo and Bhattacharya (2006) argue that CSR leads to higher customer
satisfaction, which in turn increases firm value

McAlister, Srinivasan, and Kim (2007) show that advertising and R&D
intensities reduce firms CAPM beta
R&D may actually increase a firms 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 channels
Increased cash flow
Reduced market risk
Increased liquidity

Advertising can also reduce liquidity risk the risk that a stock cant be
traded when market returns are low
Advertising increases individual investor awareness
Individual investors tend to be liquidity providers

The spillover effect due to advertising can be as high as 1.3% of shareholder
value
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My Research Focus
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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
Capital Structure and Satisfaction
Firms with more debt experience higher pressure to meet the interest
payments
Limited flexibility (Fresard 2010)
Cost-cutting in long-term investments (Peyer and Shivdasani 2001)

Investments in intangible assets such as customer satisfaction are difficult to
justify and therefore easy to cut under pressure
Cutting advertising for brand building
Reducing product and service quality (Maksimovic and Titman 1991; Matsa 2011)
Changing the pricing policy (Chevalier 1995)

Indebted firms are likely to invest less in customer satisfaction as it
generates cash flows in the long term
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Key Findings
Indebted firms have lower customer satisfaction on average

The negative relationship exists only for the firms that have fewer growth
opportunities
Managers of low growth firms might be overinvesting in customer satisfaction
Debt acts as a disciplining mechanism

Higher customer satisfaction reduces firm value when the debt levels are
higher
This indicates that using debt to reduce free cash flows is actually a value increasing
strategy
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Thank You!