Financial Markets and Marketing The Tradeoff between R&D and Advertising During an Economic Downturn

Surinder Tikoo, SUNY New Paltz
Ahmed Ebrahim, Fairfield University

Article comments

This is a pre- print of an article published in Journal of Advertising Research. The definitive publisher-authenticated version is available online at

http://www.journalofadvertisingresearch.com, DOI: 10.2501/S0021849910091178

Abstract

This article examines the association between stock returns and earnings changes of firms that have made different tradeoffs with respect to R&D and advertising spending during an economic downturn. During the 2000–2002 bear market that was associated with a downturn in the U.S. economy, we find the coefficient that relates stock returns and earnings changes to be significantly greater for firms that increased their advertising expenditures and decreased their R&D expenditures than for firms that increased their R&D expenditures and decreased their advertising expenditures. Our results suggest that investors perceive that an increased emphasis on advertising can enable firms to stem earnings erosion that can potentially occur during an economic downturn.