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Advertising, R&D Expenditures and the Market Value of the Firm

Author(s): Keith W. Chauvin and Mark HirscheySource: Financial Management, Vol. 22, No. 4 (Winter, 1993), pp. 128-140Published by: Blackwell Publishing on behalf of the Financial Management Association InternationalStable URL: http://www.jstor.org/stable/3665583 .

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Advertising,& D Expendituresn d

t h e M a r k e t V a l u e o f t h e F i r m

KeithW.Chauvin nd MarkHirschey

Keith W.Chauvin s AssistantProfessor of Businessand MarkHirschey s Professor ofBusiness,bothat the Universityof Kansas, Lawrence,Kansas.

N This paper providesevidence that advertisingand re-

search anddevelopment R&D)expenditureshave large,

positive and consistent nfluences on the marketvalue of

the firm. Like informationon currentcashflows, data on

advertisingand R&D spending appearto help investors

form appropriate xpectations concerning the size and

variabilityof future cash flows. As a result,spendingon

advertisingandR&D can be viewed as a form of invest-

mentin intangibleassets withpredictablypositive effects

on futurecash flows.While the significantmarketvalue effects of advertis-

ingandR&Daregenerallyapparentor all COMPUSTAT

firms,suchaggregate videncehasthepotential o obscure

meaningfuldifferencesacrossfirm size classesand ndus-

trygroups.Consistentwith thefact thatonly a handfulof

firmsareresponsible or substantial dvertisingandR&D

spending, he valuation ffects of advertising ndR&D are

most uniformlyevident in the case of largefirms.Infact,thevaluationeffects of advertising nd R&D aretypically

greaterfor larger as opposed to smaller firms in both

manufacturingndnonmanufacturingectors.These find-

ings suggest that size advantagesmake advertisingand

R&Drelativelymoreprofitableorlarger irms.Neverthe-

less, smaller firms do not appearto be precludedfrom

making profitableinvestments n advertisingand R&D.

Some evidence emergesto suggestthat the well-targetedadvertisingand R&D efforts of the smallestfirmsin the

economycan be highly profitable.

I.InvestmentAspects of Advertisingand R&DExpenditures

An emerging body of research considersthe market

value effects of a wide range of corporate nvestment

decisions. McConnelland Muscarella[15], for example,find thatunanticipatedncreases nplannedcapitalexpen-

We thank formereditor James S. Ang, threeanonymousreferees,and

seminar participantsat the University of Kansas for several helpfulcommentson anearlierdraft.Ofcourse,anyerrors hatremainaresolelyourresponsibility.

128



CHAUVIN& HIRSCHEYADVERTISING,&DEXPENDITURES 129

ditures have a positive effect on the marketvalue of thefirm and that unanticipateddecreases have a negative

impact.Statmanand Sepe [20] reporta correspondingly

positivemarketreaction to the termination f investment

projects hathavepoorprospects,while BrickleyandVan

Drunen[4] find anegativereaction o operatingunit iqui-dations. Blackwell, Marr,and Spivey [2] find a signifi-

cantly negativestockmarketreaction o plant-closingan-

nouncements.

Chan, Martin, and Kensinger [5] and Doukas and

Switzer[7]reportnteresting videnceonthe stockmarket

reaction to a very specific type of corporate nvestment

decision: announcementsof increased R&D spending.Chan,Martin,andKensinger 5] and DoukasandSwitzer

[7] find statisticallysignificantR&D announcementdayreturns,especially in the case of large"high-tech"ndus-

trial firms that devote substantial esources o R&D. The

positive share-pricereaction to announcements of in-creasedR&D spendingdiscovered n thesestudiescanbe

takenas evidence of a strong inkbetweenR&Dspendingand the marketvalueof the firm,a link that is especiallyrobust n the case of largefirms.

To furthernvestigate hisrelation,ourpaperconsiders

the cross-sectional influences of both advertisingand

R&D expenditureson the marketvalueof the firm. This

paperconsidershow thetraditionally ecognizedvaluation

effects of current ashflow,growth,risk and market hareare augmentedwhen both advertisingandR&D are con-

sideredaspotentially mportantourcesof intangible api-tal. To the extent thatadvertisingand R&D expenditures

representa type of investmentexpenditure hatgives rise

to economic benefitslastingmorethan one year,a market

value influencecan be anticipated.Ofcourse,current ash

flows may also reflect,atleast in part, hepositive effects

of previous nvestmentsn advertising ndR&D.Oncethe

valuation effects attributable o current cash flows are

controlled,any incrementalvaluation effects of current

advertisingand

R&D expenditures epresentevidence ofintangiblecapitalor asset-like influences.1

Thispaperbuilds on relatedresearchby Hirschey[10],

Jose, Nichols, and Stevens [12], Lustgarten and

Thomadakis 14], Merck,Shleifer,and Vishny[17], andMorck and Yeung [18]. Each of these studies reportspositive marketvalue effects of advertisingand R&D

expendituresthat are consistentwith a forward-lookingperspectiveof stockmarketnvestors.Unfortunately,achof these studies s restrictedbydataconsiderations o fairlylimitedsamplesof largefirms.Data is now availablethat

makes a much morecompleteanalysispossible,includingconsiderationof the differences in the effectiveness of

advertisingandR&D acrossfirmsize classes andbetween

manufacturingndnonmanufacturingndustrygroups.

II.EconomicCharacteristicsofAdvertisingand R&D

A.Advertisingnd R&D pendingbyIndustryGroup

Exhibit 1 shows the distributionof advertisingandR&D expendituresby COMPUSTATirmsorganizedac-

cording o broad wo-digit ndustry roups.2Thesedataarefirmaveragesoverthe 1988-1990 period.Thepurposeof

Exhibit1 is to illustrate hat he distribution f advertisingand R&D is fairlyskewed.The distribution f advertising

intensityandR&Dintensityacrossall industriess clearlynot uniform.While bothadvertisingandR&D areimport-antmethodsof

intangible apital nvestment,t is

relativelyrare o find firmsand ndustries hatemploybothmethods

in tandem.

Advertisingexpendituresandadvertisingntensityare

especially high among toy companies included in

COMPUSTAT'smiscellaneous manufacturing ndustry(such as TonkaCorp., Mattel, Inc., and Hasbro, Inc.),motionpicturecompanies,andfirmsthatprovideamuse-mentandrecreationproducts.Advertisingntensity s also

high among irmsproviding ducational ervices,food andkindredproducts, obacco,andleatherproducts.Little,if

any,advertisings notedforfirms nheavymanufacturing

'HirscheyandWeygandt 11] show that f economic amortization f the

exponentialdecay type can be assumed,alongwith constantpercentageratesof growth n advertising ndR&Dexpenditures,hen hemagnitudeof intangiblecapitalequalsannualexpenditures n advertisingor R&D

multipliedby a constant.Given theseassumptions,hestockof intangible

advertisingand R&Dcapital s strictlyproportionalo theflow of adver-

tising andR&D expenditures,andthe valuationeffects of each type of

expenditure anbe taken asindicativeof intangiblecapital nfluences.

2COMPUSTATnnualdata temsare aken rom hefullcoverageversion

of COMPUSTAT CPlus forthe 1988-1990 period.Theoverallsampleis limitedto those firmshavingnonegativebook values and at least$100million in marketcapitalization sharepricetimes the numberof shares

outstanding,price-adjusted o December31, 1990). The marketvaluescreen is used to avoid marketvalueestimationproblemsfor firmsthat

are nactively raded n thinmarkets.TheCOMPUSTATirmsstudied n

thispaper nclude hoseresponsible or anaggregate verage$58.9billionin advertising expendituresper year, or 77.5% of the $75.9 billion

aggregateaverage or allCOMPUSTATirmsover he 1988-1990period.Firmsincludedareresponsible or an aggregateaverage$92.2 billion inR&D expendituresper year, or 78.8% of the $117 billion aggregateaverage or all COMPUSTATirms over the 1988-1990 period.



130 FINANCIAL ANAGEMENTWINTER993

Exhibit 1. The Distributionof AdvertisingandR&D Spendingfor COMPUSTAT irmsOrganizedby Two-DigitSICCode IndustryGroups,FirmAverages or 1988-1990 (DollarAmounts n Millions)

Two-DigitNumber Sales

AdvertisingAD/S Per

IndustryR&D R&D/SPer

SIC of Industry Per Industry Per Firm R&D Per FirmGroup IndustryGroup Firms Sales Firm Advertising Firm (Weighted) Spending Firm (Weighted)

I Agriculture roduction 4 $3,832.0 $1,045.1 $65.3 $17.8 1.7% $85.1 $23.2 2.2%8 Forestry 2 309.0 154.5 0.0 0.0 0.0% 0.0 0.0 0.0%

10 Metalmining 21 6,441.1 311.7 0.0 0.0 0.0% 1.9 0.1 0.0%12 Coalmining 4 1,823.6 455.9 0.0 0.0 0.0% 0.0 0.0 0.0%13 Oil andgas extraction 49 49,330.4 1,006.7 0.5 0.0 0.0% 457.2 9.3 0.9%14 Miningnonmetallicminerals 5 3,266.2 653.2 0.7 0.1 0.0% 20.3 4.1 0.6%15 Buildingconstruction 13 12,038.1 902.9 46.2 3.5 0.4% 7.6 0.6 0.1%16 Heavyconstruction 6 15,310.3 2,701.8 0.0 0.0 0.0% 106.7 18.8 0.7%17 Constructionspecialtrade) 2 2,372.3 1,186.2 0.0 0.0 0.0% 0.0 0.0 0.0%20 Food andkindredproducts 60 295,824.0 4,957.9 15,059.8 252.4 5.1% 2,511.0 42.1 0.8%21 Tobaccoproducts 5 31,286.3 6,704.2 1,210.1 259.3 3.9% 77.0 16.5 0.2%22 Textilemill products 14 13,727.2 957.7 243.5 17.0 1.8% 24.5 1.7 0.2%23 Appareland other inishedgoods 12 11,050.0 920.8 273.8 22.8 2.5% 6.3 0.5 0.1%24 Lumberand wood products 5 3,206.4 641.3 0.0 0.0 0.0% 2.3 0.5 0.1%25 Furniture ndfixtures 11 9,192.2 861.8 199.0 18.7 2.2% 58.2 5.5 0.6%

26 Paperandalliedproducts 45 124,921.3 2,796.7 521.8 11.7 0.4% 1,479.2 33.1 1.2%27 Printingandpublishing 42 53,616.6 1,276.6 1,244.8 29.6 2.3% 49.4 1.2 0.1%28 Chemicalsand alliedproducts 109 317,434.1 2,921.2 10,393.3 95.6 3.3% 16,180.1 148.9 5.1%29 Petroleum efining 33 496,104.9 15,186.9 120.7 3.7 0.0% 3,227.5 98.8 0.7%30 Rubberandplastic products 23 33,553.1 1,438.0 748.6 32.1 2.2% 555.2 23.8 1.7%31 Leatherand eatherproducts 3 2,463.0 821.0 91.0 30.3 3.7% 0.0 0.0 0.0%32 Stone,clay andglass products 11 10,713.5 974.0 86.0 7.8 0.8% 142.0 12.9 1.3%33 Primarymetals 36 75,557.4 2,079.6 0.2 0.0 0.0% 603.7 16.6 0.8%34 Fabricatedmetalproducts 29 27,803.9 958.8 572.1 19.7 2.1% 299.7 10.3 1.1%35 Indust.machinery& computer quip. 115 335,594.6 2,926.7 3,013.0 26.3 0.9% 20,975.7 182.9 6.3%36 Electronic quipment 76 249,503.3 3,282.9 4,592.5 60.4 1.8% 13,141.7 172.9 5.3%37 Transportationquipment 52 516,709.8 9,873.4 5,823.8 111.3 1.1% 18,480.5 353.1 3.6%38 Measuringnstr.,photography,watches 68 134,634.4 1,979.9 2,339.5 34.4 1.7% 7,185.8 105.7 5.3%39 Misc.manufacturingndustries 16 6,546.7 409.2 589.5 36.8 9.0% 142.1 8.9 2.2%40 Railroad ransportation 10 40,523.0 3,921.6 0.0 0.0 0.0% 0.0 0.0 0.0%42 Motor reight ransportation 9 9,391.6 1,083.6 0.0 0.0 0.0% 0.0 0.0 0.0%44 Water ransportation 9 5,915.5 633.8 53.1 5.7 0.9% 0.0 0.0 0.0%

45 Airtransportation 16 59,604.2 3,725.3 1,014.6 63.4 1.7% 0.0 0.0 0.0%46 Pipelines 3 948.0 355.5 0.0 0.0 0.0% 0.0 0.0 0.0%47 Transportationervices 4 3,357.5 839.4 0.0 0.0 0.0% 0.0 0.0 0.0%48 Communications 50 234,292.3 4,717.3 2,160.2 43.5 0.9% 4,306.8 86.7 1.8%49 Electric,gas, sanitary ervices 174 263,269.6 1,510.2 0.2 0.0 0.0% 3.0 0.0 0.0%50 Wholesaledurablegoods 33 157,162.4 4,811.1 86.8 2.7 0.1% 36.4 1.1 0.0%51 Wholesalenondurable oods 27 105,983.8 3,925.3 69.6 2.6 0.1% 5.2 0.2 0.0%52 Buildingmaterials,hardware& garden 6 8,985.1 1,418.7 155.0 24.5 1.7% 0.0 0.0 0.0%53 Generalmerchandise tores 26 153,890.7 5,995.7 2,713.2 105.7 1.8% 0.0 0.0 0.0%54 Food stores 18 73,207.4 4,067.1 561.0 31.2 0.8% 0.8 0.0 0.0%55 Autodealers andgas stations 2 2,088.1 894.9 40.7 17.5 2.0% 0.0 0.0 0.0%56 Apparelandaccessorystores 18 28,507.8 1,583.8 448.2 24.9 1.6% 0.0 0.0 0.0%57 Home furniture ndequipment tores 7 7,684.8 1,047.9 265.2 36.2 3.5% 0.0 0.0 0.0%58 Eatinganddrinkingplaces 24 22,598.6 954.9 808.0 34.1 3.6% 0.0 0.0 0.0%59 Miscellaneousretail 20 22,792.3 1,158.9 421.4 21.4 1.8% 0.8 0.0 0.0%60 Depository nstitutions 16 23,159.8 1,447.5 47.9 3.0 0.2% 0.1 0.0 0.0%61 Nondepository redit nstitutions 16 87,815.3 5,488.5 204.6 12.8 0.2% 653.6 40.9 0.7%62 Securityandcommoditybrokers 18 33,839.1 1,845.8 383.1 20.9 1.1% 16.2 0.9 0.0%63 Insurance arriers 5 3,583.3 767.8 6.8 1.5 0.2% 0.0 0.0 0.0%64 Insurance gentsandbrokers 7 5,305.2 723.4 0.0 0.0 0.0% 10.6 1.4 0.2%65 Real estate 6 1,264.0 210.7 16.5 2.8 1.3% 0.0 0.0 0.0%67 Holdingandother nvestmentoffices 18 1,673.8 94.7 1.1 0.1 0.1% 0.2 0.0 0.0%70 Hotelsandother odgingplaces 4 2,007.6 501.9 69.3 17.3 3.5% 0.0 0.0 0.0%72 Personal ervices 6 5,967.9 994.6 46.9 7.8 0.8% 0.0 0.0 0.0%73 Business services 64 39,019.9 609.7 319.4 5.0 0.8% 1,231.7 19.2 3.2%75 Autorepair, ervices,andgarages 4 5,893.7 1,360.1 65.8 15.2 1.1% 0.0 0.0 0.0%78 Motionpictures 12 10,380.2 889.7 912.1 78.2 8.8% 14.9 1.3 0.1%79 Amusementandrecreation 11 9,197.9 836.2 612.4 55.7 6.7% 8.9 0.8 0.1%80 Health services 20 17,721.6 901.1 82.5 4.2 0.5% 3.6 0.2 0.0%82 Educational ervices 2 676.9 290.1 41.2 17.7 6.1% 18.3 7.9 2.7%87 Engineering, ccounting& otherserv. 14 11,382.6 794.1 14.5 1.0 0.1% 37.5 2.6 0.3%

Totalsample 1,548 $4,303,257.1 $2,076.0 $58,856.9 $27.7 1.6% $92,169.2 $23.1 0.8%




Exhibit 2. TheTop20LeadingCOMPUSTAT irms n Termsof AdvertisingandR&DExpenditures ndAdvertisingand

R&D Intensity,1988-1990 (DollarAmounts n Millions)

TheTop

20Firms

inTermsofAdvertisingExpenditures

Two-Digit Advertising Advertising R&D R&DIntensityRank CompanyName Industry Expenditures Intensity AD/S) Expenditures (R&D/S)

1 UnileverCombined 20 $3,274.7 9.35% $653.0 1.87%

2 PhillipMorrisCompany, nc. 20 2,387.7 6.56% 302.3 0.83%

3 GeneralMotorsCorp. 37 2,014.4 1.63% 5,114.3 4.15%4 Proctor& Gamble Co. 28 1,771.0 8.20% 657.7 3.04%

5 FordMotorCo. 37 1,337.0 1.40% 3,218.3 3.37%

6 FiatSpa(ADR) 37 1,229.0 2.68% 1,718.0 3.74%

7 PhilipsN V 36 1,215.3 4.01% 2,429.8 8.01%

8 BristolMyersSquibb 28 1,177.6 13.88% 688.0 8.11%

9 EastmanKodakCo. 38 1,055.7 5.83% 1,243.0 6.86%

10 Warner-Lambert o. 28 992.2 23.27% 315.8 7.41%

11 Sony Corp. 36 984.7 4.79% 1,196.1 5.82%

12 SaraLee Corp. 20 913.0 8.12% 0.0 0.00%13 AmericanTelephone& Telegraph 48 904.3 1.71% 2,552.3 4.82%

14 Pepsico,Inc. 20 887.8 5.78% 95.0 0.62%

15 Coca-ColaCo. 20 887.5 9.67% 0.0 0.00%

16 RalstonPurinaCo. 20 774.4 11.83% 66.5 1.02%

17 RJRNabiscoHoldings Corp. 21 735.0 4.95% 0.0 0.00%

18 HondaMotorLtd. 37 681.3 2.51% 1,314.4 4.85%

19 ChryslerCorp. 37 673.5 2.02% 914.3 2.74%

20 Gillette Co. 34 667.5 16.35% 91.1 2.23%

Average $1,228.2 7.23% $1,128.5 3.47%

TheTop20 Firms n Termsof Advertising ntensity


1 A & W Brands,Inc. 20 $36.1 32.67% $0.0 0.00%

2 BlockDrug 28 135.7 30.04% 13.6 3.01%

3 ArmorAll ProductsCorp. 28 39.2 26.22% 0.0 0.00%

4 Warner-Lambert o. 28 992.2 23.27% 315.8 7.41%

5 BlairCorp. 59 105.1 23.02% 0.0 0.00%

6 OrionPicturesCorp. 78 117.9 22.99% 0.0 0.00%

7 NeutrogenaCorp. 28 43.4 21.97% 1.4 0.70%

8 ValueLine, Inc. 62 14.2 21.85% 0.0 0.00%

9 Borland nternational 73 32.8 19.29% 18.8 11.06%

10 Noxell 28 99.2 19.02% 6.4 1.22%

11 Alberto-CulverCo. 28 128.7 18.23% 0.0 0.00%

12 Amre,Inc. 59 33.2 18.07% 0.0 0.00%

13 Playboy Enterprises 27 29.2 17.99% 0.0 0.00%14 Carter-Wallace,nc. 28 98.3 17.30% 43.9 7.73%

15 TonkaCorp. 39 146.7 16.85% 30.1 3.46%

16 TycoToys, Inc. 39 63.3 16.47% 6.0 1.55%

17 GilletteCo. 34 667.5 16.35% 91.1 2.23%

18 HersheyFoodsCorp. 20 389.4 15.99% 17.0 0.70%

19 Mattel,Inc. 39 194.8 15.80% 37.6 3.05%

20 Wrigley(Wm.)Jr.,Co. 20 152.8 15.30% 0.0 0.00%

Average $176.0 20.44% $29.1 2.11%




Exhibit 2. TheTop20 LeadingCOMPUSTAT irms n Termsof AdvertisingandR&DExpenditures ndAdvertisingand

R&DIntensity,1988-1990 (DollarAmounts n Millions)- Continued

TheTop20 Firmsin TermsofR&DExpenditures


1 GeneralMotorsCorp. 37 $2,014.4 1.63% $5,114.3 4.15%

2 IBMCorp. 35 0.0 0.00% 4,844.7 7.59%

3 NECCorp. 35 360.7 1.52% 3,873.8 16.32%

4 FordMotorCorp. 37 1,337.0 1.40% 3,218.3 3.37%

5 HitachiLtd. 35 562.4 1.14% 3,009.3 6.09%

6 AmericanTelephone& Telegraph 48 904.3 1.71% 2,552.3 4.82%

7 MatsushitaElectric 36 480.2 1.14% 2,438.2 5.79%

8 PhilipsNV 36 1,215.3 4.01% 2,429.8 8.01%

9 FiatSpa 37 1,229.0 2.68% 1,718.0 3.74%

10 Digital Equipment 35 96.2 0.78% 1,482.0 11.96%

11 Du Pont(E.I.)De Nemours 28 0.0 0.00% 1,378.0 3.84%

12 GeneralElectric Co. 36 471.0 0.88% 1,322.7 2.47%13 HondaMotor 37 681.3 2.51% 1,314.4 4.85%

14 EastmanKodakCo. 38 1,055.7 5.83% 1,243.0 6.86%

15 Hewlett-PackardCo. 35 327.7 2.81% 1,218.3 10.45%

16 Sony Corp. 36 984.7 4.79% 1,196.1 5.82%

17 Volvo Ab. 37 226.3 1.50% 1,028.8 6.83%

18 ImperialChemicalInds. Plc. 28 445.7 1.99% 973.7 4.36%

19 UnitedTechnologiesCorp. 37 0.0 0.00% 970.1 4.91%

20 Dow Chemical 28 516.0 2.86% 927.0 5.14%

Average $645.4 1.96% $2,112.6 6.37%

TheTop20 Firms in Terms f R&DIntensity


1 ChinronCorp. 28 $0.0 0.00% $38.8 108.86%

2 GeneticsInstitute, nc. 28 0.0 0.00% 29.0 97.70%

3 Biogen, Inc. 28 0.0 0.00% 19.0 92.04%

4 SCIOS,Inc. 28 0.0 0.00% 7.0 56.34%

5 Centocore, nc. 28 4.0 6.26% 33.5 52.35%

6 CetusCorp. 28 1.9 5.43% 13.4 39.03%

7 Synergen,Inc. 28 0.0 0.00% 5.5 46.18%

8 Alza Corp. 28 1.2 1.68% 29.4 39.72%

9 Genentech, nc. 28 28.1 7.38% 138.0 36.28%

10 Continuum, nc. 73 0.0 0.00% 32.8 34.06%

11 ImmunexCorp. 28 0.0 0.00% 6.8 29.40%

12 Nova PharmaceuticalCorp. 28 0.0 0.00% 3.9 25.69%

13 CypressSemiconductorCo. 36 3.0 1.61% 45.6 24.26%14 Evans & SoutherlandComputerCorp. 36 1.2 0.88% 33.5 23.58%

15 ManagementScience America 73 5.2 2.09% 58.9 23.57%

16 Amgen,Inc. 28 2.4 1.10% 43.9 20.50%

17 MacNeal-SchwendlerCorp. 73 0.8 1.60% 10.5 22.19%

18 CadenceDesign Systems,Inc. 73 0.5 0.34% 29.9 20.29%

19 Ashton-TateCo. 73 17.8 6.64% 53.7 20.07%

20 TelematicsInternational,nc. 35 2.0 3.70% 10.8 19.93%

Average $3.4 1.94% $32.2 41.60%




Ill.Methodology and Data

A.Sources of CapitalizedMarketValueOf primaryconcernto this studyis the role played by

advertising ndR&D asdeterminants f the currentmarket

value of the firm.To isolate suchinfluences,theeffects of

other factors thatmightaffectcurrentmarketvalue must

be constrained,including cash flow, growth, risk, and

market hareconsiderations.Current ash flow is takenas

the best available ndicatorof a firm'sabilityto generatecash flows duringfutureperiods.Cash flow is measured

by operating ncome before depreciationminus interest

expense, taxes, preferreddividends and common divi-

dends. MillerandModigliani[16] argue hatgrowthhasa

positive effect on marketvalues if future nvestmentsare

expected to earn above-normalrates of return,and if

growth is an importantdeterminant of these returns.Growth s measuredby the least-squaresestimate of the

three-yearrate of growthin sales for each firm. While

growthaffectsthemagnitude f anticipatedxcessreturns,a valuation influence may also be associated with the

degreeof stabilitysuchreturns xhibit.Risk is measured

in thispaperusingthelogarithm f the ratioof the 52-week

high and low stock price for each firm, an index that is

proportionalo the Garman nd Klass[8]"ideal" olatility

estimator.With an increasein risk, the marketvalue ofexpectedreturnswill fall (Thomadakis 22]). Thomadakis

[22], among others, considers the valuation effects of

marketshare data as a potentially mportantndicatorof

the firm's ability to earn economic rents tied to market

power or superiorefficiency.Marketshareis definedas

total revenue n thefirm'sprimary-productour-digitSIC

industry xpressedas a percentageof industry ales.

B.MeasuringCapitalizedMarketValueAlternative cross-sectional measures of the market

valueof the firm can be employedto learnwhether nves-tors recognize long-termor asset-like characteristicsof

advertisingand R&D expenditures.Among the most fa-

miliarof these are Tobin's"qratio" Brainard ndTobin

[3]),definedas the marketvalueof the firmnormalizedbythe replacement ost of tangibleassets; and Thomadakis'

[22] "relativeexcess valuation" EV/S),measuredas themarket value of common minus the book value of

stockholders'equity, all normalizedby sales. Both areattractivevariantsof the ratioof the marketvalue of the

firm dividedby the book value of tangibleassets studied

by MillerandModigliani[16].

While q and EVIS provide appealing market-basedviews of investor xpectations oncerninghefirm's uture

profit potential,neitheris completely free from the use

and/orabuse of accountingconventions.Bothq andEVISaremarketcumaccounting-basedmeasures hatare sub-

ject to measurementerrors n the valuation of tangibleassets. The q data are subjectto errorto the extent that

flaws persist n accountingreplacement ost data,just as

EV/S s subject o errorgiventhataccountingbookvalues

measure mperfectlyhe economicvalueof tangibleassets.

While it is commonlypresumed hataccountingreplace-ment costs providea measureof tangible assets that is

superior o traditionalbook value data,this is not neces-

sarily rue. ndeed,WattsandZimmerman23]argue, rom

a market-based erspective, hataccountingreplacementcost numbersare irrelevantor securitypricingpurposes.It follows thatreplacement ost adjustmentsobook value

data have thepotential o obscure,rather hanmake more

precise,the level anddeterminants f thecapitalizedvalue

of the firm(Landsman ndMagliolo [13]). In addition o

theirobvious exposureto accountingmeasurement rror,bothq andEV/Saresubject o accountingbias as well. As

Schwert[19]argues, uch measuresare ikelytoreflect,at

least in part, he effects of accountingpolicy decisions.If

firmscapitalizenonproductive ssets so as to smooth or

hide monopoly profits, both q and EVISwill be corre-

spondinglybiased.To provide an unbiased framework or analysis, this

studyconsiders he effectsof advertising ndR&D on the

marketvalue of commonequitywithoutany accounting-based adjustments.Both q and EVIScan be viewed as

accounting-adjustedand size-adjusted valuation mea-

sures,where the replacement alue of tangibleassets and

sales, respectively,are employed for size normalization

purposes.Therefore,hisstudy ocuses onthemarket alue

implicationsof advertisingand R&D in a manner that

minimizes the potential oraccountingerroror bias.

Based on theseconsiderations, generalmodelis sug-

gested:

MarketValue= ao + blCash Flows + b2Growth+ b3Risk

+ b4Market hare+ b5Advertising

+ b6R&D+ e. (1)

Size normalizations accomplished n this studybydefla-

ting (dividing)bothdependentandindependent ariables

for each firm i by total sales revenue raised to the 1.5

power,S1". This methodof size normalizationwas chosen




on anempiricalbasis; S1.5 s thelog likelihoodratio-min-

imizingdeflator.

C.The DataThisstudy ocuses oncross-sectional amplesof COM-

PUSTAT firms over the three-year period from 1988

through1990,inclusive.Anaverageofroughly1,500firms

per year are considered.Firm-levelrather hanindustry-level data areanalyzedto ensurean exact matchbetween

advertising,R&Dandmarket aluefigures.Thisapproachallows for a detailedconsiderationof the role played byfirm size andindustry onditionsandhas theadvantageof

avoidingindustryclassificationerrors or widely diversi-

fied firms. Such an analysis seems worthwhile n light of

findingsreportedby Acs and Audretsch 1]who study helarge-firmand small-firm hareof innovation n 247 four-

digit SIC industries.While not directly tested in their

analysis,Acs and Audretsch[1] suggestthatmeaningfulsize-baseddifferences n the effectiveness of R&Dspend-

ingmaybe observed orrelativelysmall firms.Thepoten-tial for size-based differencesin the valuationeffects of

advertisings also of interest; t lies at theheartof sugges-tions that high advertisingintensity creates barriersto

entry or newrivalsandbarriers omobilityfor established

nonleading irms.

Of similar nterest s the potential or industrycharac-

teristics o influencethe valuationeffects of both advertis-

ing and R&D. Forexample,the basic research ypicalof

high-tech irms s quitedifferent romtheappliedresearch

or developmentalworktypicalof the R&Deffort of firms

in low-tech sectors.Similarly, he valuation ffects of priceandproductpromotioncan also vary dependinguponthe

potentialandabilityof advertisers o build durablebrand

loyalty.Tocapture uchinfluences, ndustry ffectscan be

broadly ndicatedusinginterceptdummyvariable nterac-

tions fortwo-digitSIC ndustry roupclassifications.Such

two-digitSICdummyvariableshave the effect of isolating

the market value effects of advertisingand R&D fromotherindustry-specificvaluationconsiderations. n addi-

tion, the basic valuation model can be analyzed over

samples of advertising-intensive nd R&D-intensivein-

dustriesto learn the extent to which the valuationeffects

of advertisingand R&D expendituresare mitigated bysubstantial romotional nd nnovativeactivityby compet-itors.

By analyzing he overallsampleof firms, naddition o

a simple two-partbreakdownfor manufacturing ersus

nonmanufacturingirms,it becomes possibleto learn the

extentto whichexpenditures nadvertising ndR&D have

broadrather hannarrow mplications or the value of the

firm.By consideringthe marketvalue implicationsof a

three-part ample partitionaccordingto firm size (mea-

suredbysalesrevenue), heextentto whichfirmsizeplaysa role in determininghe marketvalue effects of advertis-

ing and R&D can also be learned.

III.EmpiricalEstimation

A.ComparativeResultsfor theManufacturingndNonmanufacturingSectors

Afterallowing for potentially mportant imultaneous

influencesamongrelationsdescribingmarketvalues and

other importantelements of marketstructure,Connollyand Hirschey [6] find no significant endogenous influ-

ences. Therefore, he model describedpreviouslyis esti-

mated through straightforward pplicationof ordinaryleast squares OLS).The model is estimated or eachyearwithin the 1988-1990 periodfor bothmanufacturingnd

nonmanufacturingectors,as well as over pooled cross-

sectionalsamplesof all available irmsforthe 1988-1990

period. In each annual regression, two-digit SIC code

interceptdummy variables are employed to control for

industry-relatedifferences n the marketvalueof thefirm.

In eachpooled

cross-sectionalsample regression,

these

two-digitSIC code interceptdummyvariablesaresupple-mented with annualdummyvariables o control for tran-

sitory influences relatedto overall stock market condi-

tions. Using an F-test, the hypotheses of no industry-relatedortime-related ffects can beeasily rejectedat the

a = 0.01 level for each sampleanalyzed.Using anF-test,the hypothesisof no difference in estimation results for

manufacturingversus nonmanufacturingndustriescan

also be rejectedat the a = 0.01 level. Since the annualand

pooled sample regressionsare uniform in terms of the

inferencesthey provide, only pooled sampleresults are

reported n the interestof saving space.Exhibit 3 offers broad-basedevidence of long-lived

benefits to advertisingand R&D by showingtheirvalua-

tion influencesfor size-basedsamplesof firms akenfrom

manufacturing ndnonmanufacturingectors.Accordingto census classificationcriteria,manufacturingirmsfall

within two-digit SIC code industrygroupsbetween 20

(foodandkindredproducts)and 39 (miscellaneousmanu-

facturingndustries).From Exhibit1, it is clearthatR&D

activity is concentratedamong firms from within the

manufacturing ector, whereas advertising expendituresare more broadly dispersed among both manufacturing




Exhibit 3. FirmSize and the Effects of Advertisingand R&D on the MarketValueof the Firm,1988-1990 (t-Statisticsin Parentheses)

COMPUSTATirms

Fromthe

Manufacturingector

(20 <SIC<

40)Cash Market Sample

FirmSize Class Intercept Flow Growth Risk Share Advertising R&D R F Size

Largestone-third 1,657.790 3.758 -0.159 -1,342.181 3.092 6.560 6.527 0.587 40.24b 764

(4.48)b (9.62)b (-0.05) (-3.28)b (0.61) (10.49)b (10.54)b

Middle one-third 346.658 5.330 -0.568 -261.028 2.320 2.395 3.599 0.415 19.41b 764

(4.66)b (12.82)b (-0.67) (-4.07)b (2.48)a (3.92)b (5.71)b

Smallest one-third 118.205 2.207 0.069 -25.360 0.739 4.120 5.382 0.246 9.26b 764

(3.82)b (7.40)b (1.61) (-1.56) (1.67) (4.48)b (9.48)b

All manufacturingirms 73.897 4.509 0.095 -19.051 1.479 7.047 6.216 0.571 111.54b 2,292

(2.33)a (22.91)b (1.94) (-1.07) (3.26)b (18.41)b (18.55)b

COMPUSTATirmsFromNonmanufacturingectors(SIC< 20 or SIC? 40)

Cash Market SampleFirmSize Class Intercept Flow Growth Risk Share Advertising R&D R2 F Size

Largestone-third 343.816 3.488 -2.842 -614.814 11.351 9.103 10.561 0.539 20.17b 787

(0.35) (15.06)b (-1.88) (-2.46)a (3.44)b (5.32)b (6.30)b

Middle one-third 180.770 2.303 0.734 -195.757 1.945 -0.102 11.582 0.365 8.66b 787

(0.65) (6.50)b (1.67) (-2.40)a (1.40) (-0.07) (5.76)b

Smallest one-third 146.791 1.941 0.118 -17.438 -0.555 7.811 -0.095 0.224 4.55b 787

(4.75)b (6.64)b (1.06) (-0.90) (-1.16) (3.70)b (-0.06)

All nonmanufacturingirms 140.582 4.260 0.101 -38.350 0.377 6.164 6.812 0.325 22.23b 2,361

(4.31)b (24.83)b (0.88) (-1.93) (0.81) (6.14)b (6.03)b

All COMPUSTATirms

Cash Market SampleFirmSize Class Intercept Flow Growth Risk Share Advertising R&D R2 F Size

Largestone-third 815.407 3.636 2.098 -904.632 7.467 6.725 6.956 0.587 34.73b 1,551

(0.85) (18.32)b (1.00) (-4.26)b (2.95)b (12.29)b (14.31)b

Middle one-third 363.996 2.531 0.633 -232.183 2.378 2.634 7.905 0.427 16.00b 1,551

(1.14) (10.26)b (1.51) (-4.56)b (2.94)b (3.77)b (11.33)b

Smallest one-third 147.190 2.108 0.059 -24.486 -0.054 5.178 3.556 0.210 5.88b 1,551

(5.48)b (9.92)b (1.25) (-1.85) (-0.16) (4.90)b (5.13)b

All firms 132.293 4.308 0.090 -32.095 0.754 6.928 6.466 0.437 50.75b 4,653

(4.71)b (34.16)b (1.85) (-2.40)a (2.33)a (17.24)b (18.60)b

Note:Statistically ignificant wo-digitSIC ndustry roupandannualdummy binary)variablesareestimated butsuppressed)n eachof theseweighted

least-squares egressionsoverpooled cross-sectionsamplesof firm data.

alIndicatestatistical ignificanceat the 0.05 level.bIndicates tatisticalsignificanceatthe 0.01 level.

andnonmanufacturingirms.By itself, therelativelycon-

centrated atureof R&Dactivitysuggeststhepotential or

a greaterevel of R&Deffectiveness nthemanufacturingsector. On the other hand, it is likely that advertising

expendituresgive rise to effective productdifferentiation

in a broadrangeof industries.

Despite some differences in explanatorypower be-

tween themanufacturingndnonmanufacturingectors, t

is clearfromExhibit 3 that a simplemodel candescribea

meaningfulshareof the firm-by-firmvariation n market

values.Inthemanufacturingector,morethanone-halfof

the variationnmarketvalues can be attributedo variation

in cashflows,growth,market hare,advertising nd R&D.

In the nonmanufacturingector,roughlyone-thirdof the

variation n marketvaluescan be similarlyattributed;he

only exception being thereplacementof growthwith risk




as an important onsideration.Given the relativeconsis-

tency of valuationeffects due to advertisingand R&D in

the manufacturing nd nonmanufacturingectors, it ap-

pearssafetoargue hatbothtypesof expenditures iveriseto intangiblecapital.From an economicperspective,both

advertisingand R&D constitutealternative orms of in-

vestment n profitable ntangibleassets.An economically

appropriateccounting reatmentwould therefore nvolve

acapitalization ndamortizationreatmentypicalof other

formsof capitalexpenditures.Publicpolicythatallows an

immediate expense treatmentof advertisingand R&D

expendituresortaxpurposes,ratherhana moreeconom-

ically appropriate apitalizationand amortization reat-

ment,results n animplicittaxsubsidyforadvertisingand

R&D intensivefirms

(see Hirscheyand

Weygandt[11]).Therefore, hisfindingof long-livedbenefitsfor advertis-

ing and R&D expendituress of practical nterest o both

firmsandpublicpolicy-makers.And finally, in contrast o some popularassumptions

that stock market nvestors are myopic in their focus on

short-runperformance, hese findings suggest that inves-

tors evaluate the advertisingand R&D effort of firms

within a long-termperspective.

B. FirmSize EffectsAcs and Audretsch

1]find

higherevels of innovative

activity n industries hat eaturerelatively argefirms,but

that he elevated evel of creativeendeavoremanates rom

smaller rather hanlargercompetitors.Grilliches[9] re-

portsthatsmall (less than$2 million R&D) firmsappearmore "efficient" han their argercompetitors n thattheyare able to generatea relatively argernumberof patents

per dollarof R&D expenditure.As suggestedby Scherer

[19], the most favorable climate for rapidtechnological

progressmaybe an environment hat ncludeslargefirms

with the capacity to undertakeambitiousdevelopments

complementedby a large numberof small (below $500

millionsales) technologicallyorientedcompetitors.These findings suggest the potential for interesting

differencesin the effectivenessof R&D expendituresac-

cording o firmsize. Similarly,t is worth nvestigatinghe

potential orfirmsize effectson theeffectivenessof adver-

tising expenditures.To the extent that advertisingand

R&D effectiveness is influencedby firm size considera-

tions, the potentialexists for the marketvalue impactof

advertisingand R&D to differaccording o firmsize. To

theextentthateconomiesof scaleor othersize advantagesin advertisingand R&D are present, the market value

effect of a dollarin advertisingand/orR&D expenditures

will be greaterfor larger as opposed to smaller firms.

Conversely,to the extent that diseconomies of scale or

othersize disadvantagesn advertising nd R&D arepres-

ent,the market alue effectof a dollarof advertising nd/orR&D expenditureswill be moderated orrelatively argerfirms.

Exhibit 3 illustrates he influence of firm size on the

marketvalue effects of advertising ndR&Dexpenditures

using a simple three-partbreakdownof each sampleac-

cording to sales revenues.For example, over the entire

COMPUSTAT ample,the valuationmodel is estimated

for subsamplesof large-size(> $1,424.2 millionin sales,

$7,782.3 million average),medium-size($384.8 million

< middle< $1,424.2 million,$764.5millionaverage),and

small-size (< $384.0 million, $184.6 million average)firms. Samplesof manufacturing nd nonmanufacturingfirms are divided n a similar ashion. FromExhibit3, it is

clear that he valuation ffects of advertising ndR&Dare

consistentlypositiveand of a comparableorderof magni-tude for largefirms.By way of contrast,some variabilityis presentin termsof the valuationeffects of advertisingand R&D sponsoredby smaller irms.Interestingly,n the

nonmanufacturingector,no significantvaluationeffects

are associatedwith advertisingby medium-sizefirms nor

with small-firmR&D.

Aftercontrolling or other mportant aluationeffects,

evidence reported n Exhibit 3 suggests thatthe marketvalue influence of advertisingdoes indeed dependuponfirm size considerations.Usinga t-testof thedifference n

coefficients, the superiority of large-size firm over

medium-size irmadvertisings statisticallysignificant n

the manufacturing ector (t = 4.76), nonmanufacturingsector(t= 4.10), andfor all COMPUSTATirms(t= 4.46).

Similarly, he superiority f small-sizefirmover medium-

size firmadvertisings evident n themanufacturingector

(t = 6.45), nonmanufacturingector(t = 3.54), and for all

COMPUSTATirms(t = 5.33). Taken ogetherwith data

reportedin Exhibit 2, these findings suggest that sizeadvantagesare relevant n determining he valuation ef-

fects of advertising.At the sametime, it does not appearthat arge-size irmadvantages recludeeffective advertis-

ing by smaller,specializedfirms.Indeed,the advertisingof largefirms s moreeffective thansmall-size firmadver-

tising only in themanufacturingector(t = 2.19).The influenceof firmsize onthe stock market aluation

of R&D expenditures s also evident in the findingsre-

ported n Exhibit 3. Again, usinga t-testof the difference

incoefficients, hesuperiority f large-sizeoversmall-size

firmR&D is statisticallysignificant n the manufacturing




sector(t = 1.36),nonmanufacturingector(t = 5.99), and

for all COMPUSTATirms(t = 4.02). The superiorityof

large-size irmover medium-size irmR&D is also evident

in the manufacturingector (t = 3.13). Therefore,espe-

cially when the R&D-intensivemanufacturing ector is

considered, argefirmadvantagesn R&D are unmistak-

able. The superiority f medium-sizeover small-sizefirm

R&Dis less evident,butsignificantn thenonmanufactur-

ing sector(t = 2.07), and for all COMPUSTATirms(t =

1.85). The ability of smallerfirms to conduct effective

R&D shouldnot be overlooked,however,as evidencedbythe fact that superiorsmall-size firm over medium-size

firmR&Dis evident nthemanufacturingector t= 3.67).

Therefore,basedupona marketvalue perspective, he

advertisingandR&D

activityof

largerirms

appearso be

relativelymore effective than that of smallercompanies.These results areconsistentwith thepreviouslydiscussed

event-study esultson R&DreportedbyChan,Martin, nd

Kensinger[5] and Doukas and Switzer [7]. Just as the

market'sresponseto R&Dannouncements s more favor-

able in the case of larger spending ncreasesreportedby

largefirms, the marketcapitalizationof advertisingand

R&D seems to generally ncreasewithfirmsize.

C.IndustryEffects

Lustgartennd Thomadakis

14], buildinguponearlier

researchby Thomadakis 22], find that he cross-sectional

relationof Tobin's q to firm characteristics an depend

uponmarket tructurenfluences.Thus, hepotential xists

forthe marketvalueimplicationsof firm-specific eatures,such as marketshare,advertisingandR&D, to varywith

industry onditions.Insupportof thishypothesis,Doukas

and Switzer [7] suggest that the benefits accruingfrom

R&D expendituresmay be greater or firmsoperating n

industrieswhere the shareof industrysales concentrated

amongthe fourlargest irms s relativelyhigh.

Advertisingand R&D coefficientestimates n avalua-

tion model of this type, that differaccording o firmsize,offer evidenceof size-baseddifferences nadvertising nd

R&D effectiveness.Moderatelyreducedeffects of adver-

tisingand R&Don the marketvalueof smaller irmsmayreflect the fact that such efforts are often the focus of

rivalryand imitationby biggerand better-financedivals.

Alternatively,market value differences across smaller

firmsmay simplybe tied moreclosely to the fortunesof

specific industries,whereas large diversifiedfirms are

morebroadlypositioned o takeadvantage f scale advan-

tagesinadvertising, ndbothchance and ntendeddiscov-eries.

To further nvestigatethe extent to which the basic

valuation model results maybe influenced by industry-relatedconsiderations,Exhibit4 reports he marketvalue

effects of variations n the levels of advertisingandR&D

expendituresfor a variety of advertising-intensiveand

R&D-intensive(or "high-tech") ndustries.In both in-

stances,industrieswere arbitrarilyhosen on the basis of

having advertising ntensityor R&D intensityof at least

twopercentof sales as shown nExhibit1,plusa sufficient

number of observations or meaningfulanalysis.Based

uponthesecriteria, ix industrieswere chosen asrepresen-tative of the advertising-intensiveand R&D-intensive

("high-tech")ectors.Chemicalsandalliedproducts SIC

28) has the distinctionof appearingn bothcategories; t

is the sole industry group that displays high levels ofadvertising ntensityand R&D intensity.In addition to

industry-specificresults, findings are also reportedfor

pooledcross-sectional amplesof allfirms ncludedwithin

eachof theadvertising-intensivendhigh-techcategories.And finally, results are reportedfor all COMPUSTAT

firmsthatdevote morethantwo percentof sales to adver-

tising ("alladvertising-intensiveirms")or more thantwo

percentof sales to R&D ("allhigh-techfirms").When samples of firms are selected on the basis of

having high levels of advertising ntensityor R&D inten-

sity,as is the case here, then the amountof

samplevari-

ability in bothadvertisingntensityandR&D intensityis

necessarilyconstrained.This makes it relativelydifficult

to find statistically significant market value effects of

advertisingn samplesof advertising-intensivendustries.

Similarly, t is relativelydifficultto find statisticallysig-nificantmarketvalue effects of R&Din samplesof R&D-

intensive industries.It is thereforenot surprising o find

some industry-by-industryariability n the marketvalue

effects of advertisingand R&D, as shown in Exhibit 4.

Nevertheless,despitesome variabilitywithin various ad-

vertising-intensiveindustries, advertising intensity has

generallypositivemarketvalue effects across all advertis-ing-intensiveindustries and advertising-intensiveirms.

Similarly,despitesomevariabilitywithin ndividualhigh-tech industries,R&D intensityhas stronglypositive mar-

ket value effects across allhigh-tech ndustriesandhigh-tech firms.3

3Valuation ffects of advertising ndR&Dmaybe influencedbyfactors

thataffect thedegreeof congruencebetweenmanagerial nd stockholder

interests.To studythepossibilitythat the marketvalue effects of adver-

tising and R&Dmay be sensitive to agency problemconsiderations, he

basic valuationmodel was tested for both independentand interactive



CHAUVIN&HIRSCHEYADVERTISING,&DEXPENDITURES 139

Exhibit 4. Intraindustryffects of AdvertisingandR&Don the MarketValueof theFirm n theAdvertising ntensiveand

High-TechIndustries,1988-1990 (t-Statistics n Parentheses)

Advertising/s ntensive ndustries

IndustryDescription Cash Market Sample(SIC Code) Intercept Flow Growth Risk Share Advertising R&D R2 F Size

Food and kindredproducts 20) 18.505 9.410 -0.549 -65.125 1.764 5.255 5.000 0.735 58.92b 179

(0.23) (9.08)b (-0.45) (-0.46) (1.36) (5.98)b (1.32)

Printingandpublishing 27) 145.879 9.019 -2.134 -92.228 -0.276 8.274 12.790 0.520 15.82b 126

(1.78) (9.64)b (-0.87) (-0.45) (-0.19) (3.41)b (0.71)

Chemicals and allied 19.680 4.931 -0.029 43.949 3.980 4.782 12.616 0.716 99.95b 326

products 28) (0.41) (8.99)b (-0.08) (0.85) (1.29) (5.17)b (15.00)b

Rubberandplastic 150.098 9.132 -0.563 -65.079 -1.969 2.618 -4.073 0.713 18.96b 70

products 30) (2.73)b (7.76)b (-0.46) (-0.51) (-0.80) (1.29) (-1.00)

Fabricatedmetalproducts 34) 98.265 6.177 -0.036 72.535 0.421 4.531 1.017 0.620 15.88b 87

(1.44) (6.98)b (-0.04) (0.63) (0.45) (3.84)b (0.26)

Eatinganddrinkingplaces (58) 16.508 11.763 0.234 -43.727 81.220 -5.980 N.A. 0.818 40.43b 71

(0.47) (11.51)b (1.09) (-0.90) (1.60) (-2.52)a

All firms n advertising/s 50.672 4.484 0.124 -8.614 2.235 5.536 12.319 0.611 71.38b 1,114

intensive ndustries (1.27) (15.03)b (0.77) (-0.30) (2.84)b (11.42)b (20.12)b

All advertising/s ntensive -36.563 1.992 0.227 -26.842 4.499 7.466 10.476 0.577 24.06b 972

firms (-0.39) (6.43)b (1.35) (-0.75) (3.55)b (13.48)b (15.78)b

R&D/S Intensive "High-Tech")ndustries

IndustryDescription Cash Market Sample(SIC Code) Intercept Flow Growth Risk Share Advertising R&D R2 F Size

Chemicals and allied 19.680 4.931 -0.029 43.949 3.980 4.782 12.616 0.716 99.95b 326

products 28) (0.41) (8.99)b (-0.08) (0.85) (1.29) (5.17)b (15.00)b

Industrialmachineryand 84.888 5.276 0.442 -55.741 4.944 3.528 2.848 0.642 75.18b 344

computer quipment 35) (3.23)b (10.50)b (2.40)a (-1.88) (4.72)b (2.70)b (5.33)b

Electronicequipment 36) 138.800 2.598 0.108 -53.848 0.666 9.499 4.173 0.507 28.16b 228

(4.05)b (4.02)b (1.77) (-1.28) (0.65) (5.42)b (4.92)b

Transportationquipment 37) 168.728 2.046 0.053 -12.327 2.712 -4.016 5.702 0.638 32.55b 157

(3.64)b (4.33)b (0.07) (-0.18) (1.86) (-2.30)a (7.81)b

Measuring nstruments, 79.669 9.301 0.246 21.946 0.694 1.458 0.903 0.614 38.85b 204

photography nd watches (38) (2.58)b (11.39)b (1.49) (0.53) (0.56) (0.67) (0.79)b

Business services(73) 97.144 8.102 0.078 -55.990 -0.350 8.446 3.034 0.540 26.87b 192

(2.49)a (9.86)b (0.29) (-1.24) (-0.18) (2.43)a (2.18)a

All firms n R&D/Sintensive 127.008 4.736 0.108 -23.664 2.071 5.658 6.112 0.562 120.12b 1,517

("high-tech")ndustries (4.35)b (17.25)b (2.04)a (-1.25) (3.12)b (10.11)b (15.91)b

All R&D/Sintensive -140.498 5.091 0.118 6.516 2.444 6.324 6.074 0.604 44.40b 1,115

("high-tech")irms (-0.67) (14.96)b (1.93) (0.27) (2.19)a (9.01)b (13.00)b

Notes:

Statistically significant two-digit SIC industrygroupand annualdummy(binary)variables are estimated(but supressed) n each of these weightedleast-squares egressionsoverpooledcross-sectionsamplesof firmdata.

N.A. means "notapplicable" ndrefersto asubsample hat did not includeanyfirms withR&Dspendingoverthe 1989-1990 period.alndicates tatistical ignificanceat the 0.05 level.

blndicates tatisticalsignificanceatthe 0.01 level.

effects of thepercentageof closely heldshares,measuredby the shareof

stock heldby insidersand argeoutside nterests.However,no consistentand material nfluence of the percentageof closely held shares on the

valuationeffects of advertisingand R&D was noted(at the 0.05 level).

This suggests thatthe role played by agency problems n modelingthevaluationeffects of advertisingand R&D is somewhat angential o themain thrustof thisresearch.




IV.ConclusionsPositive effects of advertisingand R&D expenditures

on the marketvalueof thefirmare llustratedn thispaperfor broadly representative samples of COMPUSTAT

firms. Like currentcash flow, growth,risk, and market

share,advertisingand R&D expendituresconstitutekeydeterminants f the marketvalue of the firm. The market

value effectsof advertising ndR&Darebroadlyoperative

throughoutboth manufacturingand nonmanufacturingsectors.As such,advertising nd R&Dappearas attractive

alternativemeans of investmentin valuable intangible

capital hathavedifferingdegreesof relevance ndifferent

economic sectors.

Findings reportedhere also suggest the potentialfor

interestingdifferencesin the effectivenessof advertisingand R&Dexpendituresaccording o firm size. Consistent

with R&D event-studyresultsreportedby Chan, Martin,andKensinger 5] andDoukasand Switzer[7], size advan-

tages exist in advertisingand R&D activity;the market

value effectof a dollar n thesetypesof expendituresends

to be greater orrelatively arger irms.Still, the evidence

also suggests thatadvertisingand R&D expendituresby

smaller,specializedfirms can be highly effective. While

thereareobviously importantdifferencesbetweenadver-

tising andR&D, these two types of expenditurescan be

regardedas alternativeorms of investment n intangible

capitalthat contributeo shareholder alue.

References1. Z.J.Acs andD.B. Audretsch,"InnovationnLargeandSmallFirms:

An EmpiricalAnalysis,"American EconomicReview(September

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