By 2017, total advertising¹ spending is expected to approach $136 billion, placing more pressure on management to demonstrate its impact on sales and stock prices. It's the age-old question of advertising effectiveness. While nearly every research study has found that advertising has a positive impact on sales, the results are mixed regarding its effectiveness on stock price, which can be seen as an indicator² of future sales.

 

New research from professors at the Kelley School of Business at Indiana University, the McCombs School of Business at the University of Texas and the W. P. Carey School of Business at Arizona State University found the reason advertising boosts stock prices for some companies and not others.

 

They found that companies that set out to differentiate³ themselves through brand equity⁴ and thus create intangible firm value benefit more from advertising than firms that simply set out to become cost leaders.

 

"They're both very valid⁵ strategies. Different companies choose different approaches. They both can be very successful for companies," said Niket Jindal, an assistant professor of marketing⁶ at Kelley.

 

"Advertising can increase awareness⁷; it can increase sales regardless," he added. "But it's only for those companies that have a differentiation⁸ strategy where advertising's going to build up brand equity ... and shareholder⁹ value.

 

"That's not to say that it's wasteful¹⁰ spending for those cost leaders; there's still value in that it's increasing their sales. But those kinds of companies shouldn't expect to see an impact beyond the current year's sales."

 

The paper, "Advertising Effectiveness: The Moderating Effect of Firm Strategy," has been accepted for publication by the Journal of Marketing Research. Co-authors are Leigh McAlister and Raji Srinivasan, marketing professors at the McCombs School, and Albert Cannella Jr., a management professor at the Carey School.

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