How long do the effects of advertising actually last? This issue has received increased attention in the fields of marketing, accounting, and finance. However, despite the importance of advertising for firm management, research on the effective duration of advertising costs still remains in the exploratory stage. To address this research need, this study investigated how long advertising costs function to increase sales and intangible value in association with franchising in the restaurant industry. The results of this study showed that advertising expenditures had a positive short-term effect on sales growth, whereas advertising did not significantly impact sales growth in the long run. However, when advertising expenditures were considered together with franchising, the long-term interaction effect was positively significant. The results suggest that advertising has long-term positive effects on sales growth only in restaurant firms using a franchising system. This implies that advertising costs should be recognized as investment-like assets only in franchising restaurant firms. On the other hand, advertising ratio had both positive short-term and long-term effects on intangible value. In addition, once the advertising ratio was associated with franchising, the long-term interaction effect was negatively significant. More detailed explanations and implications are included in the conclusion.
Advertising is perceived as one of the most important vehicles for boosting sales and enhancing product or service recognition in a market. However, researchers in marketing and accounting/finance have questioned whether the effects of advertising on firm performance are long-lasting (Baghestani, 1991, Chauvin and Hirschey, 1993, Dekimpe and Hanssens, 1999, Hirschey and Weygandt, 1985, Peterson and Jeong, 2010, Wang and Zhang, 2008 and Wang et al., 2009). Even though the question is critically important to firm management, the duration and magnitude of advertising effects have yet to be accurately determined within academia (Peterson and Jeong, 2010 and Wang et al., 2009). The essence of this ambiguity is related to the manipulation of advertising outlay in accounting regulations. Under general accounting rules, advertising outlay is perceived as an expense. Since the effects of advertising are short-lived and quickly disappear, they should be counted as a one-time expense in an accounting period. However, if the effects of advertising actually last longer, current accounting rules would not correctly reflect the nature of advertising outlay. If the effects are long-lived, then advertising outlay should be perceived as an investment behavior and should be amortized for the effective period.
In the restaurant industry, advertising is a common tool for marketing practitioners to acquire customer attention and build brand equity in the market (Hsu and Jang, 2008). Gallo (1999) stated that the restaurant industry had strong growth in advertising expenditures, with over 95% of advertising budgets allocated to television. In addition, a professional advertising research company (Crain Communication, Inc.) reported that in 2009 alone McDonald's Corp., Yum! Brands, and Burger King Holdings, spent 1,236.4, 882.4, and 401.9 million dollars, respectively, on advertising. These restaurant companies were ranked 23rd, 39th, and 83rd among the top 100 U.S. advertisers. Unlike the technology industry where a high technology level is a major driver of firm value, for the restaurant industry advertising is believed to greatly contribute to corporate value. Despite the materiality of advertising in the hospitality industry, however, little attention has been devoted to the effects of advertising in hospitality academia. In a rare study on the topic, Hsu and Jang (2008) claimed that advertising expenditures had a positive influence on a restaurant firm's intangible value. However, Hsu and Jang (2008) found that while the current year's advertising was positively significance, the prior year's advertising did not significantly affect intangible firm value. These results highlight the possibility that advertising outlay is short-lived in terms of generating intangible value in the restaurant industry. However, the analyzed model and data were not appropriate for accurately determining the duration of advertising effects because they did not take franchising or a long enough time span into account.
This study investigated the effects of advertising on sales growth and intangible firm value using ECM, which allowed us to estimate short-term and long-term effects in a single equation. Unlike some previous studies that used macro economic variables (e.g., Andras and Srinivasan, 2003, Srinivasan and Lilien, 2009 and Wu and Bjornson, 1996), this study incorporated corporate level variables to examine the relationship between advertising and firm performance. The results of this study indicated that the effects of advertising could differ in the restaurant industry due to franchising. In terms of net sales growth, the long-term effects of advertising were significant only when the franchising jointly interplayed with advertising. However, in terms of intangible value enhancement, the positive long-term effects of advertising were significant only for non-franchising restaurant firms. Conversely, the interaction effect of advertising and franchising produced a negative impact on intangible value (i.e., brand equity) in the long run due to the agency costs of franchising. This is an important feature of advertising costs in the restaurant industry because franchising is a typical firm level strategy used in the industry. Consequently, even though advertising has asset-like characteristics, the long-term effects can be altered by the franchising strategy. In addition, this study found that the short-term effects of franchising were positive but the long-term effects were negative in terms of the intangible value of the firm. This implies that the synergy hypothesis between company-owned and franchised stores is only valid for a short period. Agency costs could dominate in the long run and might negatively effect intangible value enhancement.
