European Journal of Marketing
Purpose - This paper aims to address two unique and important questions. First, how do recessions directly affect firms' marketing spending decisions? Second, and more importantly, do firms which are more committed to marketing spending through past recessions achieve better stock market returns?
Design/methodology/approach - This study is based on a combination of National Bureau of Economic Research, COMPUSTAT and Center for Research in Security Prices data on 6,000 firms between 1982 and 2009 which are analyzed using panel data-based regression models.
Findings - The authors find that firms cut marketing spending during recessions. However, firms committed to marketing spending during past recessions achieve better stock market returns. The findings are found to be robust across B2B and B2C industries, different periods and US firms which vary on the proportion of their global revenue from non-US sales.
Research limitations/implications - Top executives cut marketing budgets during recessions; however, if they can resist the pressures, and strategically continue to make marketing investments during recessions, they will achieve higher stock market returns.
Originality/value - This is the first paper to establish the longer-term (not short-term) positive stock market performance of continuous (not episodic) marketing spending through past recessions, i.e. the view that marketing spending is necessary (not discretionary) for stock returns.
Recent research has shown that managers in publicly traded companies facing earnings pressure-the pressure to meet or beat securities analysts' earnings forecasts-may make business decisions to improve short-term earnings. Analysts' forward-looking performance forecasts can serve as powerful motivation for managers, but may also encourage them to undertake short-term actions detrimental to future competitiveness and performance. To identify whether managerial reactions to earnings pressure suggest evidence of intertemporal trade-offs, we explored how companies respond to earnings pressure under different conditions of corporate governance that shape the temporal orientations of managers. Using data on competitive decisions made by U.S. airlines under quarterly earnings pressure, we examined the effect of earnings pressure on competitive behavior under different ownership structures (ownership by long-term dedicated investors versus transient investors) and CEO incentives (unvested incentives that are restricted or unexercisable in the short term, versus vested incentives). The results suggest that companies with more long-term-oriented investors and long-term-aligned CEOs with unvested incentives are less likely to soften competitive behavior in response to earnings pressure, relative to companies with transient investors and CEOs with vested, immediately exercisable stock-based incentives. Using a difference-in-differences (DiD) specification for stronger identification, we also found that firms respond to their rivals' earnings pressure shocks by increasing capacity and prices, particularly when those rivals do not have long-term-oriented investors and CEO incentives. The evidence is more aligned with the view that the pursuit of short-term earnings as a result of earnings pressure may be detrimental to long-term competitiveness.
The International Journal of Accounting
We test for differences in financial reporting quality between companies that are required to file
periodically with the SEC and those that are exempted from filing reports with the SEC under
Rule 12g3-2(b). We examine three earnings quality measures: conservatism, abnormal accruals,
and the predictability of earnings. Our results, for all three measures, show improved financial
reporting quality for companies that file with the SEC than for those that are exempt from filing
requirements; this difference in financial reporting quality can lead investors to question why the
SEC allows the exemption (and is currently discussing expanding the exemption) when one of
the primary goals of the SEC is the protection of US investors.