THE EFFECTS OF ADVERTISING AND BRAND VALUE ON

FUTURE OPERATING AND MARKET PERFORMANCE

Li Li Eng and Hean Tat Keh

ABSTRACT: This paper examines the joint effectsof advertising and brand value on the firm'sfutureoperating andmarket
performance.We operationalize futureoperating and market performance as futureaccounting returnsand futurestock
returns,respectively.Our resultsshow thatboth advertising and brand value improve futureaccounting returnsat the firm
level.The impact of advertising and brand value on futurestock returns isminimal. We findthat spending on advertising
results in better brand sales and brand profitability.Brand value is also a good predictor of brand performance.Thus, we
conclude that advertising and brand value benefit the brand and the firmthrough improved accounting performance.

In thispaper,we investigatethe impactof advertisingand relate marketingactivitytoactualperformance" (2001, p. 5).

brandvalueon future operatingandmarketperformance. Key Subscribingto theview thatit isessentialtomakemarketing
intangibleassetssuchasbrandvalue (orbrandequity),product more financially accountable(Srivastava, Shervani,andFahey
differentiation,and goodwillare theoutcomesof investment 1998), in thispaperwe examine the effectsof advertising
in advertising.It isgenerallybelieved thatadvertisingcon and brandvalue on the firm'sfutureoperatingandmarket
tributesto thecreationofbrandvalue (Chaudhuri2002; Chu performance.
andKeh 2006; Kimelman 1993; SheininandBiehal 1999). There has been a steadystreamof researchstudyingthe
Mizik and Jacobson(2003) argue thatbrand-basedadvertis financialimpactof advertisingand brandvalue. Specifically,
ingcan createa comparativeadvantageforfirmsthroughits prior studiesexamine thecontemporaneous associationbe
abilitytodifferentiate the firm'sproduct.The brandcan be tweenadvertisingexpensesand accountingand stockmarket
a formidable barrierto imitation,as brandequity isdifficult returns(Ericksonand Jacobson1992), advertisingexpenses
forcompetitorsto copy,becomingan effective entrydeter andmarketvalue of thefirm(ChauvinandHirschey 1993),
rencestrategy.Industry observers and analystsnote that many advertising and perceivedquality(MoorthyandZhao 2000),
companiescontinueto emphasizebrand-buildingactivities. perceivedqualityand firm value (Aakerand Jacobson1994),
Forexample,Samsunghasbeen ratedby Interbrand, a brand brand attitude and firm value (Aaker and Jacobson 2001),
consultingfirm, as thefastest-growing brandoverthepast few brandingstrategy and firm value (Rao,Agarwal,andDahlhoff
years("YunJongYong" 2004). The CEO of Samsung, Yun 2004), and brand value and firmvalue (Barth et al. 1998; Kerin
JongYong, has been instrumental indrivingthecreationof andSethuraman1998; SimonandSullivan1993). From these
itsbrandvalue, claiming,"Our future will depend on our representative studies,we canmake twostriking observations:
brandequity." (1) previous researchtypicallyinvestigatesthe financial effects
While brand value creation is generally regarded as a "good ofadvertisingand brandvalue separately, and (2) theyexam
thing,"we need to havemore concretemeasures of brand ine the contemporaneous effectof either advertising or brand
valueappropriation (i.e.,extractingprofitsfrombrandvalue). value,but notboth,on firm performance.
Merely knowingtheeffect of brandvalue on purchaseintent Our studyaddressesthesetwoissues.First,ithasbeenshown
(Cobb-Walgren,Ruble, and Donthu 1995) is inadequate; thatadvertising hasan important pass-through effect on brand
rather, we need to understandthe financialconsequencesof ing (Sheininand Biehal 1999). Advertisinginfluences value
brand value (Chu and Keh 2006; Mizik and Jacobson 2003). creation in a firmby acting as an appropriation mechanism to
managers,it isespecially
AccordingtoKeller, "Topracticing build brand names and erect market barriers deterring com
importanttodevelopbettermeasuresthatareable todirectly The key roleof advertisingina firm's
petitorentry. commu
nicationstrategyincreatingbrandequity is realizedthrough
thepromotionof ideas,goods,or services.In a practicalsense,
Li Li Eng (Ph.D., University ofMichigan) is an assistant professor
of accounting,William S. Spears School of Business, Oklahoma
State University. The authors thank Joanne Chin, Lydia Gutierrez, Joo Hyung Ha,
Hean Tat Keh (Ph.D., University ofWashington) is an associate JamieOng, andYuyun Sejati forresearchassistance.They also thank
professorofmarketing, Guanghua School ofManagement, Peking Srini Sankaraguruswamy,Ping Tu, theEditor, and two anonymous
University. reviewers for theircomments on earlier versions of thispaper.

vol. 36, no. 4 (Winter2007), pp. 91-100.

JournalofAdvertising,
( 2007 AmericanAcademy ofAdvertising.All rightsreserved.
ISSN 0091-3367 /2007 $9.50 + 0.00.
DOI 10.2753/JOA0091-3367360407

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92 The Journal ofAdvertising

brandequity represents theadded value theproductgarners Hirschey (1993) provideevidence thatadvertisingexpense

as a resultofpast investments in themarketingactivityfora has a positiveinfluence on themarketvalue of thefirm. They
brand (Keller2003). Despite theargumentforthisrelation suggestthatspendingon advertisingcan be viewedas a form
ship,however,todate the literature has not explicitlyexam of investment in intangibleassetswith positiveeffectson fu
ined the jointeffectsof advertisingand brandvalue on firm turecash flows.When Ericksonand Jacobson(1992) control
performance. Chaudhuri(2002) proposesa stylized model of fortheendogeneitybetweendiscretionary expendituresand
howbrandreputation affects theadvertising-brand equitylink. profitability,however,theyfindthatadvertisinggenerates
Using surveydata,hemodels brandreputation as amediator substantially loweraccountingand stockmarket returnsthan
on theeffect ofbrandadvertising, brandfamiliarity, andbrand indicatedinpreviousresearch.In a recentstudy, Chu andKeh
uniquenesson brandequityoutcomes. His resultssuggestthat (2006) investigatetheeffects of advertising,
promotion,and
advertising or indirectly
directly affects
brandequitymeasured R&D expenseson brandvalue creation.They findthatthese
as brandsales,marketshare,and relativeprice. laggedexpensesyielddiminishingreturnstobrandvalue.
Second, firmsspend largeamountsannuallyon advertis Another streamof researchlooksat the relationshipbe
ingand brandvalue creation with theexpectationof reaping tweenbrandequityand firm value.According toSimon and
returnsin thefuture. As such,it is importanttoexaminenot Sullivan (1993), financialmarketsdo not ignoremarketing
only thecontemporaneous effectofadvertising orbrandvalue factors,and stockpricesdo reflect marketingdecisions.The
on firm performance, but also theirlaggedeffects.Although it marketvalueof a firm, as capturedby itsstockprice, isbased
hasbeenwell establishedthatadvertising hascarryover (or"du on theaggregateearningpowerof both tangibleand intan
rable")effects(Assmus,Farley,andLehmann1984;Berkowitz, gible assets.In otherwords, thefinancialmarketvaluationof
Allaway,andD'Souza 2001a, 2001b; Clarke 1976), little is a firmincorporates theexpectedvalueof futurecash flowsand
knownabout thecarryover effectofbrandvalue.As notedby returns,including market expectationsof theappropriation
Chu and Keh (2006), it is important to test the lagged effect value of the firm's brand equity. In a similar vein, Aaker and
of brandvalue. Specifically,
thispaper extendsprior research Jacobson(2001) findthatchangesinbrandattitudeareasso
by examining the joint effects of advertising and brand value ciatedcontemporaneously with stockreturnand future-term
on thefirm'sfutureoperatingandmarketperformance. accountingperformance.
The remainder of thepaper isorganizedas follows.
We first Barth et al. (1998) examine theassociationbetweenFi
reviewtherelatedliterature
on theinformation valueofadver nancialWorldmagazine's brand value estimatesand equity
tisingexpenseandbrandvalueestimates. We thenpresentthe sharepricesof firmsowning thebrands.They estimatethe
hypotheses models,and subsequently
and research describethe association between the brand value estimates and share prices,
sample and data. Following the data analysis, we discuss the controllingforequitybook value and net income.They also
theoretical andconclude
andmanagerialimplications, with the changesinbrand
estimatetheassociationbetweenyear-to-year
and futureresearch
limitations,
contributions, directions. value estimatesand annual sharereturns,
controllingfornet
incomeand changesinnet income.They findthatbrandvalue
THE INFORMATION VALUE OF ADVERTISING estimatesprovidesignificant powerforshareprices
explanatory
AND BRAND VALUE incrementaltoadvertisingexpense,operating
margin,growth,
and market share. Brand value estimates are also significantly
According to Low and Mohr: "To be sure, advertising is vital positivelyrelatedto sharepricesaftercontrollingforrecog
to brand equity. However, advertising, per se, is not a sacred nizedbrandassetsand analysts'earningsforecasts.
cow that should necessarily be part of every year's marketing Also using Financial World's brand value data, Kerin and
allocation.Monies shouldbe allocatedtoadvertising onlyifit Sethuraman(1998) investigate therelationship
betweenbrand
has a clearlydefinedrolewithin thatyear'sstrategy
for
meeting valueand shareholdervalue,measuredasmarket-to-book ratio,
a brand'sgoals" (1999,p. 72).They reachedthisconclusionvia forconsumergoods companies.Having studied58 firmsin
a qualitativestudyusing 21 in-depthinterviews. Our review 1995 and 55 firmsin1996, they make twoobservations:There
of the literature indicates that previous research has not spe isa positiverelationship
betweenbrandvalue and shareholder
measured theimpactsofadvertising
cifically andbrandvalue, value,and thisrelationshipisconcavewith decreasingreturns
and theirjointeffect,on firm
performance.By examiningthe to scale.
effectsof advertisingand brandvalue,ourwork contributes In summary,previous studies indicate thatadvertising
to theexistingliterature. expenses, measuresofperceivedquality,brandattitude,and
There have been numerousstudies,however,on the indi brand value estimates are value-relevant or have information
vidual effect of advertising on the persistence of profits (e.g., value. However, most of these studies look only at the con
Mueller 1990), implyingthatexcessreturns
erodemore slowly temporaneouseffectsofadvertisingand brandvalue,without
forfirmsthatadvertiseheavily.For example,Chauvin and consideringthe laggedeffects.
We extendprior researchby

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 Winter2007 93

examininghow advertisingand brandvalue jointlyrelateto Keh (2006). Based on an experiment,Sheinin and Biehal
operatingandmarketperformance.
future (1999) show thatadvertisinghas a "pass-through"effecton
thebrand,whereasChu andKeh (2006) suggestthatadvertis
MODELS AND HYPOTHESES DEVELOPMENT ingexpensecontributestobrandvalue creation.Given that
both advertisingand brandvalue are closelyintertwined, it
In thispaper,we firstconceptualizeand thenempirically is importanttogo beyondstudyingthe individualeffects of
testtwomodels. The firstmodel looksat the jointeffectof advertisingandbrandvalue.As such,we posit thattheireffect
advertisingandbrandvalueon firm-levelperformance,while on futureoperatingandmarketperformance may be jointly
thesecondmodel analyzestheeffectsofadvertising
andbrand determined.Advertisingmay simultaneouslyaffectbrand
value on brand-levelperformance. value and operatingperformance, and brandvalue, in turn,
may affectoperatingperformance.
JointAnalysis ofAdvertising and Brand Value on HI: Advertising andbrandvaluearejointly
expense positively
FutureOperating andMarket Performance associatedwith thefirm'sfutureoperatingand market
performance.
Previousstudiesseektoempirically providean explanationfor
why firms advertisethrough examiningthebenefitsofadvertis Our measuresof future operatingandmarketperformance
ingasmeasuredbyproxiessuchas returns andmarketvalue. are returnon assets(ROA) and excessstockreturns,respec
These studies investigatethe effectof advertisingexpense tively. ROA is a typicalaccountingmeasure ofprofitability
on contemporaneous returnormarketvalue (e.g.,Chauvin definedas theratioofnet incometo totalassets.Excess stock
andHirschey1993; Ericksonand Jacobson1992). However, returnis thechangeinstockpriceovertheyear,controlling for
as indicatedinprior research(e.g.,Berkowitz,Allaway,and in
changes themarket return. ROA, which is an accounting
D'Souza 200 1a, 200 Ib;Clarke 1976;Yoo andMandhachitara measure, is a backward-looking indicatorofperformance. In
2003), advertisinghas carryover effects.Assmus,Farley,and contrast, which isamarketmeasure,isa forward
stockreturn,
Lehmannobserve,"As a rule,advertisingdoes not translate lookingindicator. Using thesefutureperformance measures
into instantaneous ar
sales" (1984, p. 68). Some researchers also allowsdirectcomparisonofour findings with priorstud
gue that the carryover effects tend to dissipate within a year ies (e.g.,Chauvin and Hirschey 1993; Erickson andJacobson
(e.g.,Leone 1995),while othershave foundlongereffects. In a 1992). We include firm size and leverageas control variables
carefully controlledstudyof television advertising conducted to explainoperatingperformance. Firm size ismeasured as
by Information ResourcesInc., itwas foundthatadvertising the logarithm of totalassets, and leverageis theratioof total
carryover effects lastedup to threeyears(AbrahamandLodish liabilitiesto totalshareholders' equity.
in the
1990;Lodishet al. 1995).Similarly, analyzing Dockers? It is informative to use lagswhen modeling the effect
brand from Levi Strauss, Naik (1999) finds that the duration of advertising on future operating andmarketperformance
of the advertising effect can be up to three years. Our paper (Berkowitz, Allaway,andD'Souza 2001a, 2001b). As shown
builds on previousresearch by examining whethertheeffect by previous studies(AbrahamandLodish 1990; Lodish et al.
ofadvertising expensestretches out beyondcontemporaneous 1995; Naik 1999), advertising carryover effect can lastup to
performance. We seektounderstand why companiesadvertise three years, and we allow our model to have lags up to four
by observing the relation between advertising expense and years.We use thecurrent effects regressionmodel tospecify the
subsequentoperatingandmarketperformance. lag structure (Rao 1972; Srinivasan and Weir 1988; Stafford,
Prior researchhas also examinedtheeffects of perceived Lippold, and Sherron2003). Saunders(1987) concludesthat
quality(AakerandJacobson1994), brandattitude(Aakerand such models function as well as themore complex ones.
Jacobson2001), consumer attitude(Hupp and Powaga2004), We jointly estimate the effects of advertising and brand
and brand value estimateson contemporaneousreturnor value on future operatingandmarketperformance, controlling
marketvalue (Barthet al. 1998;Kerin andSethuraman1998). forindustry effect. is as
The jointmodel specified follows:
Here, we use brand value as a proxy for brand reputation/
Yt = o + I3TADV /SLt_ + 68BV /TAt_ c
We next examinewhetherbrand value is
attitude/quality.
with future
associated Our
operatingandmarketperformance. + 0,ADVt_ *BVtX/
+ 2k- YkINDt (1)
study represents an initial attempt to understand the lagged + Y6SIZEt + Y7LEVt + ?t,
ofbrandvalue.
effects
As noted in theliterature we did not findprevious
review, where Yt = ROA in year t or stock returns in year t;
studies thatsimultaneouslyconsiderboth advertisingand ROA = return on assets;Returns = stockpricereturns; ADV/
brandvalue and theirjointeffecton firmperformance.Two SLt = advertisingexpense/brand sales in year t-'c;t = 0, 1,
relatedworksarebySheininandBiehal (1999) andChu and 2, 3, or 4; BV/TAt = brandvalue/totalassets in year t-Tt;

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94 The Journal ofAdvertising

*BV AVS VT
T = 0, 1, 2, 3, or 4; ADVtT * = ADV/SLtT* BV/TA ; DATA DESCRIPTION
INDt = industrydummies; 1 ifa firmis in thespecifiedindus
try,0 otherwise.We classifyfirms using theNAICS (North Brand value, brand-levelsales, and operating-incomedata
American Industry ClassificationSystem)code.The sample areobtainedfrom FinancialWorld(FW/)magazine.Kerin and
firmsbelong to code 11 (Agriculture, Forestry,Fishing and Sethuraman(1998) andBarthet al. (1998) alsouse theFWdata
Hunting), codes31-33 (Manufacturing), codes44-45, 48-49 in theirstudies.1
FWpublished thebrandvaluesof firmsfrom
(WholesaleTrade,Retail Trade,Transportation, andWare 1992 through1996, andour samplefirms aredrawnfromthis
housing),codes51-54 (Information, Financeand Insurance, period.Indeterminingthebrandvalues,FW used a valuation
Real Estate and Rental and Leasing, Professional, Scientific formulacloselyresemblingthatemployedby theInterbrand
and TechnicalServices),code 72 (Accommodation and Food Group. Interbrand did notprovideanydata toFW, however.
Services),and code 99 (Others);SIZEt = logarithmof total Instead,with thehelp of financial FW collectedthe
analysts,
data fromtradeassociations,financialstatementsand, ina few
assetst;and LEVI = totalliabilities/total shareholders'equity
in year t.
instances,thecompaniesthemselves. FW firstdeterminedthe
brand'soperatingprofits. Afterthat,theydeductedan amount
equal towhat would be earned on a basic unbranded or generic
Brand-Level Analysis ofAdvertising and
version of the product. To do that,FW estimated the amount of
Brand Value on FutureOperating Performance
capital it took to generate a brand's sales, which was averaged
Moving beyond the firm-level analysesof theeffectsof ad at 60 cents' worth of capital to produce each dollar of sales.
vertisingand brandvalue on operatingperformance, we also Following that,theydeducted5% of thecapitalemployedto
conductbrand-levelanalysisof theeffects of advertisingand get the profit attributable to the brand name alone, and made
brandvalueon brand-operating performance.This isimportant a provisionfortaxes.Finally,FW assignedamultiplebasedon
fromtheoreticalaswell aspracticalperspectives.
Theoretically, brandstrength, which rangedfrom9 to20 in1993 (Ourusoff
Assmus, Farley,and Lehmannassert:"[Aidvertisingelastic and Panchapakesan1993, pp. 42-43). We obtain a totalof
ity should be smaller at the brand level than at the product 1,390 firm-year observationsforbrand value, brand sales,
levelbecause at theproduct level the impactof advertising and brand-operating incomefrom1992 through1996: 111
has a component due to increase in total sales as well as gains observations(1992), 290 observations(1993), 282 observa
in sales of other brands.Further,advertisingincreasesin tions(1994), 364 observations(1995), and 343 observations
oligopolisticmarkets are likelyto be matched by competi (1996), respectively.
tors,and thisactiontendsto influence brand-levelelasticities The advertisingexpensedata come fromAdweek,which
downward"(1984, p. 68). From a practicalperspective,such compilesan annualdirectory ofmedia spendingby the top
in-depthanalysiswould be particularly relevanttocompanies brand-name products in theUnited States. To be consistent
(e.g., Procter & Gamble) that have multiple brands within a with theFW brandvalue data,we acquire thecorresponding
singleproductcategory(Rao,Agarwal,andDahlhoff2004). advertisingexpensedata fortheperiod between 1992 and
Individual brand managers are interested in knowing the 1996. Company-level sales, net income, and total assets data
of theirbrandsvis-a-visthoseofothercompeting
performance are obtained from the Compustat? database for the period
brands. We posit that from 1992 to 2002. The Compustat? database is a product of
Standard & Poor's. This database delivers high-quality, stan
H2: Advertising expenseand brandvalueare jointlyand dardizedfundamental
accountingandmarketdata, represent
positivelyassociatedwith thebrand'sfutureoperating ing 90% of the world's market capitalization. Stock returns
performance. data are elicited from the CRSP? stock database. CRSP? is a
We compute twooperating-performance measures at the product of the Center forResearch in Security Prices at the
brandlevel:brandsalesandbrand-operating
income.
We thus UniversityofChicago.The databasecontainscomprehensive
analyze the effects of advertising and brand value on brand and accurate historical stock data.
using thefollowing
operatingperformance model: Table 1providesdescriptivestatisticsof thevariablesused
in thispaper.The averageadvertisingexpenseof thesample
=
Oco + + 8xBVt- +
BYt ADVt_ Xk=lYkINDt
firmswas $42.678 million peryear.Themaximum expended
+ 76SIZEt+ 77LEVt+ Et (2) on advertising in a year by a sample firmwas $660 million.
Brand value for the sample firms ranged from $5 million to
where BY = brand sales or brand-operating income in year $47.978 billion, with an average brand value of $1.898 bil
t,ADVA = advertising expense in year t-T; T = 0, 1, 2, 3, or lion. The sample firms had average sales of $15.662 billion,
4; BVtT = brandvalue inyear t-tT~; = 0, 1, 2, 3, or 4; and rangingfrom$82.04 million tO$206.083 billion.On aver
othervariablesare as previouslydefined. age,brand-advertising
expensewas about3.7% ofbrandsales,

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 Winter 2007 95

TABLE I
Descriptive Statistics ofVariables

Variable Mean SD Minimum Maximum

Advertisingexpense ($m) 42.678 64.550 0 660.000

Brand value ($m) 1,898.050 4,209.790 5.000 47,978.000
Sales ($m) 15,662.480 18,153.600 82.040 206,083.000
ADVWSL .037 .056 0 .823
BVITA .334 .752 0 24.163
ROA .078 .081 -.787 1.328
Returns .153 .237 -.145 1.893
Brand sales 2,522.960 7,001.330 11.000 116,728.000
Brand-operatingincome 346.540 1,080.760 -262.000 28,525.000
Brand sales percentage .360 1.466 .001 57.409
Brand incomepercentage .627 8.304 -87.349 249.781
Notes:ADVISL = advertisingexpense/brandsales;BVITA = brandvalue/totalassets;ROA = returnon assets;returns= stockprice returns;
brand sales
sales;brand incomepercentage= brand-operatingincome/company-operating
percentage= brand sales/company income.

and brand value was about 33.4% of total assets. The mean TABLE 2
ROA was 7.8%, and averagestockreturn was about 15.3%. Pearson Correlation Analysis (p values inparentheses)
Our sampleconsistedof topbrandsin thefirms, and thiswas Returns
ADVISL BVITA ROA
reflectedin thebrandperformance measures:Averagebrand
saleswas $2.522 billion,averagebrand-operating income was ADV/SL 1.0000 -.0822 .1415 .0912
$346.54 million,brand sales-to-companysalesaveraged36%, (<.000 1) (<.000 1) (<.000 1)
BV/TA 1.0000 .0992 -.0643
and brand income-to-company incomeaveraged62.7%.
(<.000 1) (.0001)
ROA 1.0000 .2453
RESULTS AND DISCUSSION (<.000 1)
Returns 1.0000
We thenproceedtoperform correlationanalysisbetweenthe
Brand Brand
variablesin thestudy,as displayedinTable 2. The toppanel
ADV BV sales income
showscorrelations betweenadvertising,brandvalue,ROA, and
stockreturns. Correlationbetweenthevariablesisgenerally ADV 1.0000 .3751 .2507 .4166
not high.Advertisingexpense is positivelycorrelated with (<.000 1) (<.000 1) (<.000 1)
BV 1.0000 .4000 .5034
ROA (p = .1415).This indicatesthatinvestinginadvertising
(<.000 1) (<.000 1)
leadstoan increasein theprofitability
of thefirm.
Advertising Brand sales 1.0000 .5563
with stock returns,
expense is also positivelycorrelated but (<.000 I)
the correlation is very low (p = .0912). That is, the impact Brand income 1.0000
of advertising on market valuation of the firm isminimal. Notes:ADV = advertisingexpense;ADVISL = advertisingexpense/brand
The bottompanel showscorrelationbetweenadvertising, sales;BV = brandvalue;BVITA = brandvalue/totalassets;ROA = return
brandvalue, brand sales,and brand-operating income.The on assets;returns= stockprice returns.
correlation coefficients indicatethatadvertisingispositively
correlatedto brand sales (p = .2507) and brand-operating
income(p = .4166). Brand value has a significant positive Kotler,andMoorthy [19921 fora discussion).However,prior
correlation with brand sales (p = .4) and brand-operating in research(e.g.,Assmus, Farley,andLehmann1984; Berkow
come (p = .5034), implyingthatincreasedbrandvalue leads itz,Allaway,andD'Souza 2001a, 2001b; Clarke 1976;Naik
to higherbrand sales and brand-operatingincome.Finally, 1999) indicatesthatadvertising has carryover
effects.Hence,
the significant correlationbetweenadvertisingexpenseand we include advertising and brand value up to four lags in our
brand value (p = .3751) indicates that advertising leads to regression models.
higherbrandvalue. Table 3 displaystheregression ofModel 1. (Forbrev
results
Model 1 investigatesthe jointeffects of advertisingand we presenttheresultsforourmain explanatory
ity, variables
brandvalueon operatingperformance. In theliterature,there only.The resultsforthecontrolvariablesof industry, size,and
isno theoretical basis thatstatesthelaggedstructure ofadver leverage areavailablefromtheauthors.) Column 1presentsthe
tisingand brandvalue on operatingperformance (seeLilien, resultswhere theperformance measure isROA (profitability).

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96 The Journal ofAdvertising

TABLE 3
Regression of Operating Performance on Advertising Expense and Brand Value

Yt cl + PfADVISL + 6 BVITAt + oADVt_,*BV,+ 15=1yk/NDt

+ +
y6SIZE, 7LEVt
+ t(I)

ROA Returns

Dependent variable Coefficient p value Coefficient p value

ADVISLt .170*'* .0018 .111 .2288

ADVISLt I .223*** .0009 .154 .3292
ADVISLt2 .289** <.0001 .389 .1673
ADVISLt3 .267*' .0003 .643* .0641
ADVISLt4 .236'* .0056 .335 .3341
BVITAt .049*' <.000 1 -.004 .6326
.044* <.0001 -.013 .3842
BWTAt-I
BVITAt-2 .034** <.000 1 -.044 .1425
BVWTAt3 .018** .0187 -.075** .042
BVWTAt4 .013 .1179 -.109'*' .0024
ADVt*BVt -.438*' <.0001 .025 .6326
I
ADVt_I*BVt -.333** .0165 .014 .9662
ADVt-2*BVt2 -.229 .1715 .449 .4887
ADV 3*8Vt3 -.061 .7156 .785 .3239
ADV *BVtA .052 .7816 1.358* .0822
Number of observations 562 455
Mean R2 .1552 .1044
Notes:Yt = ROA inyear tor stockreturnsinyear t;ROA = returnon assets;returns= stockprice returns; ADVISL tT= advertisingexpense/brand sales in
year t-T; c = 0, 1, 2, 3, or 4; BV/TAtT= brandvalue/totalassets inyeart-TtT; r = 0, 1, 2, 3, or 4; ADIt_T*BVtPTADV/SL-*BV/TA, ; iND = industry
dummies (1 ifa firmis in thespecifiedindustry, 0 otherwise);SIZEt = logarithmof totalassets;LEV, = total shareholders'equityt.
liabilities,/total
* Significantat the10% level.

** Significantat the5% level.

*** Significantat the 1% level.

Advertisingissignificantly with con

andpositivelyassociated brandvaluemay reducethebenefitto thefirm. Of thecontrol
temporaneous ROA (coefficientADV = .170).An additional variables,we observethatlargefirmsalso havehigherROA.
of a brand increases
unit of advertising-to-sales ROA of the Table 3, column2, presentsthe resultswhere theperfor
firmby .170 units in thesameyear.Advertisinglaggedone mancemeasure is stock returns.A significantpositiveasso
(coefficient ADV_2 = .289),
ADVt1 = .223), two (coefficient ciationbetweenadvertisingor brandvalue and stockreturns
ADVt 3 = .267), and fouryears(coefficient
three(coefficient would mean thatthemarket considersadvertisingor brand
ADVX74 = .236) are significantly and positively related toROA. value as being able to create future value for the firm.How
We may thus infer that advertising has a positive impact on ever, the results indicate that advertising and brand value do
operating performance asmeasuredbyaccountingreturns. Our not havemuch impacton stockreturns. Advertisinglagged
findings heresubstantiatetheresultsinNaik (1999), thatis, threeyearshas a positive impacton stock returns.Brand
thecarryover effectsof advertisingcan impactprofitability value lagged three years and lagged four years has a negative
forup to fouryears. impacton stockreturns.Advertisingand brandvalue lagged
Brand value also has a positiveimpactonROA. The posi fouryearsjointlyhave a positive impacton stockreturns.In
tiveeffectlastsup to threeyears,but declinesover time.An general,theseresultssuggestthatthemarketdoes not seead
additionalunit of brandvalue-to-totalassets increases ROA vertisingspendingorbrandvalue as creatinggrowth in future
of the firmby .049 units in the current year. The effect lagged firmvalue.This isnot surprising, as growthin firmvalue is
one year is .044, lagged two years it is .034, and lagged three determinedby amultitudeof factors. Our model includesthe
years,.018.The jointeffect ofadvertising and brand value on controlvariablesof firm size and leverage,and theyexplain
ROA is significantly negativein thecurrentyear(coefficient futurestockreturns. That is, largefirmsand highlyleveraged
ADV *BV = -.438) and laggedoneyear(coefficient ADV * firmstendtohavehigherstockreturns.
BVt1 = -.333).While advertising and brandvalue bothhave Overall, the resultssuggest thatboth advertisingand
effectson future ROA, increasing in
advertising thepresenceof brandvalue determinefuture ROA. Advertisingand brand

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 Winter 2007 97

TABLE 4
Regression ofBrand-LevelOperating Performance onAdvertisingExpense and BrandValue

BY = c0 + PADVT + 6BV + 1X= I7kIND+ + +

76SIZEt 77LEVt &t (2)

Brand sales Brand income

Dependent variable Coefficient p value Coefficient p value

ADVt 15.559*** .0095 2.662*** <.0001

ADV., 15.053** .0142 2.582*** <.0001
ADV 2 4.372 .5129 1.257** .0256
4.316 .492 1.302** .0164
ADVO3
ADV 4 4.211 .5056 1.253** .0192
By, .626*** <.0001 .115*** <.0001
By, l .630'** <.0001 .1I6* R* <.000 I
BV,2 .662*** <.0001 .114*** <.0001
BV,3 .663*** <.0001 .113*** <.0001
By,4 .658*** <.0001 .113*** <.0001
Number of observations 563 563
Mean R2 .2082 .4718
Notes:BY, = brandsalesor brand-operatingincomeinyear t;ADV, = advertisingexpense inyeart-t; t = 0, 1, 2, 3, or 4; BV, = brandvalue inyear
t-c; t = 0, 1, 2, 3, or 4; IND, = industry 0 otherwise);SIZE, = logarithmof totalassets,;LEVt = total
dummies (1 ifa firmis in thespecifiedindustry,
liabilities,/totalshareholders' equity,.
* Significantat the10% level.

** Significantat the5% level.

*** Significantat the 1% level.

valuehaveno significant on stockreturns.

effect We conclude effecton brandprofitability. The contemporaneous effectof
thatadvertisingand brandvalue benefitfirms by improving one dollarof advertisingexpenseresultsin $2.662 of brand
futureaccountingperformance, growthin
but do not affect profits.
The effectisstillpositiveoverfourlags,but at a lower
themarketvalueof thefirms. rate.In lag four,theeffectis$1.25 3 inbrandprofitsforevery
Having conductedthefirm-level we nextexamine
analysis, dollarof advertisingexpense.Brand value also has a positive
theimpactofadvertising expenseand brandvalue on brand effecton brandprofitability.The effectofone dollarofbrand
level sales and operatingincome.Model 2 regressesbrand value is approximately $.11 in brandprofitseach yearover
salesor brand-operating incomeon advertisingexpenseand thefourlagsobserved.
brandvalue.Brand-levelanalysisallows us todirectlytrace Overall,we findthatspendingon advertisingresultsin
the effects of the value of a particular brand on the sales and better performance at the brand level in terms of brand sales
of thatbrand.The resultsare showninTable 4.
profitability and brandprofitability.
Brand value is also a good predictor
Column 1 indicatestheeffects
ofadvertising and brandvalue Thus,we concludethatadvertising
ofbrandperformance. and
on brand sales. Contemporaneousadvertising(coefficient brandvalue bringbenefitsto thebrands.
ADV, = 15.559) and advertisinglaggedone year(coefficient
= 15.053) have a positive effect on brand sales. That
ADV,_1 THEORETICAL AND MANAGERIAL
is, one dollar of advertising expense results in $15 .559 brand IMPLICATIONS
sales in the current year and $15.05 3 brand sales a year later.
The resultsindicatethatthepositiveimpactofadvertising
on Our findingsshould be of interestnot only to researchers,
but also tomanagers.On the theoreticalfront,
brand sales occurs in the firsttwo years, beyond which its effect we provide
Brandvaluealsohasa positiveeffect
isnotsignificant. on brand workson advertising
additionalsupportforprevious carryover
sales.The effectof brandvalue on brand salescontinuesup As notedpreviously,
effects. while some studies(e.g.,Leone
to fourlags.A dollarofbrandvalue resultsinapproximately 1995) argue that the advertisingeffecttends to dissipate
$.6 of brand sales in each year. within a year, others indicate that it can last up to three years
of advertisingand
Table 4, column2, presentstheeffects (AbrahamandLodish 1990; Naik 1999). The currentstudy
Advertisinghas a positive
brandvalue on brandprofitability. shows that advertising effects for the top brands can last up

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98 The JournalofAdvertising

to fouryears.
We recognizethatour data on theworld's top
brandsas rankedbyFinancialWorldmay be skewed,however,
and our findingon theadvertisingeffectmay notbe entirely
generalizable.
More important, we shednew lighton how brandvalue
has positive effectson firmperformance. After takinginto
considerationthe effectof advertising,brand value has an
incrementaleffecton future
performance. The positiveeffects
of brandvalue on accountingreturnslastup to threeyears.
Our analysisat thebrand levelyields additional insights,
and supportsthe significance of extendinganalysisbeyond
the firmlevel (Assmus,Farley,and Lehmann 1984). Brand
in
value has positiveeffectson brand sales and profitability
thenear term.
What does all thismean to themanager? We believe there
are significant
managerial implicationson threefronts.
First,
theemphasisthatfirmssuchas Samsungcontinuetoput on
brandbuilding iswell placed.Brandvaluecreationisexpected
to pay off in terms of financial returns. To illustrate, at Sam
sung,toutedas theworld'sfastest-growingbrand,annualsales
increasedfrom$27.7 billion in2001 to$34.7 billion in2002,
and thecorresponding net incomerosefrom$5.1 billion to
$6 billion. However, we caution that brand building has to be
approachedina rigorousand systematic manner,tominimize
wastage of resources.
Second, particularlyforfirms with multiple brands in
a single product category,individual assessmentof each
brand'scontribution yieldsmeaningfulinsights.InFinancial
World's 1996 brand rankings,forexample,Allied Domecq
had six brands (Ballantine's,
Kahlua, Courvoisier,Beefeater,
CONCLUSION
Priorresearch has examinedtheassociationbetweenadvertis
ingexpenseand contemporaneous accountingand stockmar
ket returns.
We contributeto theliterature byexaminingthe
effectof advertisingexpenseon futureoperatingandmarket
performance measured in termsofROA and stock returns,
respectively.
We use FinancialWorld'sbrandvaluemeasure
as a proxyforbrand reputation, and includebrandvalue as
an additionalvariable together with advertisingexpense to
explainfuture ROA and stockreturns.
The major contribution of thispaper lies in thefinding
on
the lagged effects of advertisingand brandvalue on future
operatingperformance. Our resultsindicatethatadvertising
expenseleads tohigherROA, and theeffectslastup to four
years.This findingextendspriorresearch,which looked mainly
at theeffectofadvertisingon contemporaneous A new
returns.
finding in thispaper is thatbrandvalue positivelyimpacts
futureROA up tofouryears. Our resultsfromthebrand-level
analysisarealso consistentwith thefindings at thefirmlevel,
furthering ourunderstanding ofbrandvalue appropriation.
A major limitation ofstudiessuchas thisis thatthefindings
are only as good as the secondary data obtained. There is some
debate in theaccountingfieldon thequalityandadmissibility
ofbrandvalue estimates(e.g.,FinancialWorldand Interbrand
brand valuations) (Kallapur and Kwan 2004). Nonetheless,
they are useful and important in allowing us to compare and
againstotherstudiesthatalso used the
contrastour findings
same data source (Barth et al. 1998; Kerin and Sethuraman
1998). We were able to draw new and interesting findings on

CanadianClub, andPresidente)in the"Spirits"category.The theeffects andbrandvalueon firm

ofadvertising performance.
Another limitation of this study is that we use only one ele
Ballantine'sbrandwas worth $1.974 billion and generated
$615 million in sales,with $203 million innet incomeand mix (i.e.,advertising)
ment of themarketingcommunication
a 33% profit margin. By contrast, the Presidente brand was to observe its effecton future performance in conjunction with

in brand value (Stewart 1989). A possible extension would be

estimated at $228 million, and generated $365 million
sales, $40 million in net income, and an 119% profitmargin. to also incorporate
othercommunicationselementssuch as
Which branddeservesgreaterallocationof resources?
Clearly, tradepromotions,consumer promotions,event marketingand
Allied Domecq has to make a careful assessment of all its sponsorships,andpublicityandpublic relationstostudytheir
brandsand allocate the resourcesaccordinglyto optimize effects on brand value and firm performance. Future studies
may develop and consider other aspects of brand equity such as
returns,takingintoaccounttwodimensions:(1)whetherthe
productcategoryisdominatedbypremiumor value brands, brandassociations(Aaker1991), and umbrella
brand loyalty,
branding (Erdem and Sun 2002) to examine their links with
and (2) therelativemarket sharesof thebrands(Vishwanath
andMark 1997). We believe thatthe financialimpact
operatingperformance.
of brands remains a fertile and exciting area of research.
continuestoplaya keyroleindetermin
Finally,advertising
ingfirm performance. Even afterconsideringtheroleofbrand
value,managers shouldnot neglect the roleof advertising.
Afterall, as notedby a practitioner: campaigns
"Advertising NOTE
producesalesbeyondthelifeof thecampaignitself.Indeed,the 1. Barth et al. (1998) tested and found support for the joint
values of the brands . . .were created in large part as a direct
hypothesis that theFinancial World brand value measure is reliable
resultof thecompanies'advertisingcampaignsovertheyears" and that brand value is incorporated into share prices. Based on

(Kimelman1993, p. 50). This observationis also supported their findings, itmay be inferredthat theFinancial World brand
by academicresearch(e.g.,Lodish et al. 1995). value measure is reliable. Description ofFinancial World's Brand

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Valuation Methodology is provided in detail in the appendix in
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