Advertising, Research and Development, and Systematic Risk of the Firm

Abstract

Marketing executives are being urged to speak in the language of finance to gain internal support for marketing initiatives. Responding to this call, the authors examine the impact of a firm's advertising and its research and development (R&D) on the systematic risk of its stock, a key metric for publicly listed firms. They hypothesize that a firm's advertising and R&D expenditures create intangible assets that insulate it from stock market changes, lowering its systematic risk. They test the hypotheses using a panel data on 644 publicly listed firms between 1979 and 2001, consisting of five-year moving windows. They scale the firm's advertising and R&D expenditures by its sales. After controlling for factors that accounting and finance researchers have shown to be associated with systematic risk, the authors find that advertising/sales and R&D/sales lower a firm's systematic risk. The article's findings extend prior research that has focused primarily on the effect of marketing initiatives on performance metrics without consideration of systematic risk. For practice, the ability of advertising and R&D to reduce systematic risk highlights the multifaceted implications of advertising and research programs. The article's findings may surprise senior management, some of whom are skeptical of the financial accountability of advertising programs.