This study investigates the relationships between advertising expenditure, intangible value, and risk in stock returns of restaurant firms between 2000 and 2005. Tobin's Q was used to examine intangible value, and the variance of common stock return was used to measure the investment risk. The results indicate that the level of advertising expenditure has a significant positive effect on the intangible value of the firm, suggesting that advertising expenditures could help generate intangible value in restaurant firms. However, this study did not support a significant relationship between the advertising expenditure level and the stock return risk of restaurant firms.
Advertising expenditure is one of essential budget items to support marketing activities for most companies (Zinkhan and Zinkhan, 1997). Researchers from many disciplines have attempted to identify the effects of advertising activities on corporate performance (Singh et al., 2005; Chauvin and Hirschey, 1993; Rao et al., 2004). According to Srivastava et al. (1998), advertising can create market-based assets that can contribute to the revenue increase, thereby enhancing overall shareholder value. Moreover, advertising expenditure is also found effective in creating awareness, enhancing consumer knowledge, and influencing both short- and long-term consumer preferences, and thereby generating additional revenue (Hirschey, 1982). Jones (1995) stated that advertising has multi-period effects on sales and market share and it could be a durable source of profit. Related empirical studies have reported that advertising expenditure has a positive relationship with a firm's intangible assets (Chauvin and Hirschey, 1993; Rao et al., 2004). Simon and Sullivan (1993) added that advertising positively affects brand equity through brand associations and perceived quality. However, despite the abundance of literature on advertising effects, there is no consensus on whether corporate advertising can create shareholder value and reduce risk for businesses at the same time.
Traditionally, advertising activities of restaurant companies aim to create awareness and to persuade consumers by establishing brand identity, creating demand, and positioning the brand (Mittal and Baker, 2002). According to Nation's Restaurant News (1999), there are more than 100 restaurant chains in the marketplace in the US market alone. Under the competitive environments of the industry, restaurant companies often spend more than million of dollars on advertising to promote their brands and to maintain their sales each year. Restaurant firms such as Yum! Brands, Inc., McDonald's Corporation, and Wendy's International, Inc. were listed in the Top 200 advertisers from July 2003 to May 2004, as revealed by the TNS Media Intelligence Company. However, regardless of the importance of advertising for restaurant firms, little has been done to investigate whether advertising expenditure can really be viewed as a form of investment in intangible assets with predictably positive effects on restaurant firms’ market performance and stability. Thus, the aim of this study is to make a contribution to the stream of strategic management research by investigating the impact of advertising on intangible assets and risk/stability of restaurant companies. The results of this study can provide information on the benefits of investing in advertising and can help the management of restaurant firms to make marketing strategy and efficient resources allocation. In addition, this study can be helpful to stock investors in understanding the relationships of advertising expenditure to firm value and stock return risk and, consequently, can be beneficial to making investment decision for restaurant companies.
This study examined the relationship of restaurant firms’ advertising expenditure to their intangible value measured by Tobin's Q. Four variables (profitability, financial leverage, firm size, and franchising) that have been posited to affect the performance of firms were concurrently used in the model for control purpose. Our results show a significantly positive effect of advertising on the intangible value of firms, suggesting that advertising expenditures create intangible benefits to restaurant firms. In particular, advertising may affect product introduction, differentiation, and positioning, which makes it particularly relevant for a restaurant firm's success. Currently, US tax code treats advertising as a single-period business expense, with the cost of the current year's advertising campaign being deducted from the year's gross income. However, our findings suggest that investors generally view advertising campaigns positively, which in turn results in a higher intangible value of the firms. This finding also suggested that restaurant firms should consider advertising as investment, held to the same financial criteria as any other organizational commitment of capital. Capital budgeting analysis techniques such as net present value (NPV) and internal rate of return (IRR) can be used to evaluate whether advertising expenditures represent rational or value maximizing behavior. Treating advertising differently from any other expenditure that produces multi-period cash flow is inconsistent with the financial objective of maximizing shareholder wealth.
