Advertising and R&D recession spending good for certain firms

University Park, Pa. – New research coauthored by a professor in Penn State's Smeal College of Business identifies what firm types benefit from increases in advertising and research and development spending during recessions.

In the forthcoming "Should Firms Spend More on R&D and Advertising During Recessions," Smeal's Gary L. Lilien, distinguished research professor of management science, and his coauthors examined more than 10,000 firm-years of data from publicly listed U.S. firms from 1969 to 2008, a period that included seven recessions. 

The authors found that, during these recessions, some firms overspent on R&D and advertising, some underspent, and others spent about at the right level. To determine which types of firms spent effectively, the researchers looked at how changes in R&D and advertising spending affect firms' profits and stock returns for business-to-consumer services firms (B2CServices), business-to-consumer goods firms (B2CGoods), business-to-business goods firms (B2BGoods), and business-to-business services firms (B2BServices).
 
The authors reported that most B2BGoods firms had R&D and advertising spending levels during recessions that were about at the right level. Sixteen percent and 6 percent were overspending and 16 percent and 35 percent of them were underspending on R&D and advertising, respectively. "However," the researchers say, "many B2BGoods firms got positive stock returns to R&D spending (i.e. recessions are an opportunity for them) and negative stock returns to advertising."
 
For B2BServices firms, 96 percent had about the right advertising levels in recessions. 
 
They find that the stock market rewards B2BGoods and B2CServices firms for increases in R&D spending in recessions (29 percent and 42 percent, respectively) and for increases in B2CServices firms' advertising spending in recessions (58 percent).
 
In some instances -- R&D spending by B2CGoods firms and advertising spending by B2BServices firms, for example -- the stock market either does not reward or punishes virtually all firms for increases in R&D and advertising spending in recessions.
 
The researchers found that, "in recessions, most B2CGoods firms underspend on R&D and were at about the right levels of advertising with respect to profits. Managers of these B2CGoods firms can consider increasing their R&D spending in recessions, which should increase their profits. However, B2CGoods firms do not obtain positive stock returns from either R&D or advertising spending."
 
For B2CServices firms, in recessions, most underspent on R&D and overspent on advertising with respect to profits. "Hence, these firms can consider increasing their R&D spending and decreasing their advertising spending in recessions to improve their profits," they write.
 
More generally the authors found, with all else equal, in recessions, the higher the firm's market share, the more an increase in R&D spending increases its profits while the more an increase in advertising spending decreases its profits. However, the higher the firm's financial leverage, the more an increase in advertising spending in recessions increases its profits. They found no comparable effect for R&D spending in recessions.
 
"Focusing on stock returns, the results are similar with respect to market share, i.e. the higher the firm's market share, the more an increase in R&D spending increases its stock returns while the more an increase in advertising spending decreases its stock returns," they wrote. "In addition, the effects of changes in R&D and advertising spending in recessions on firm performance vary across firms in different product-market profiles."
 
The authors' results can be applied to firms outside the sample of firms studied. Managers who wish to analyze their own R&D and advertising spending -- or that of their competitors -- can use the authors' models and approach to calculate the effects of their firm's expenditures both during recessions and in nonrecessionary periods.
 
"Should Firms Spend More on R&D and Advertising During Recessions" is forthcoming in the Journal of Marketing.

 

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Last Updated December 22, 2010