Spending on advertising, managerial incentives and firm performance

Abstract

We analyse the incentives of managers to spend on marketing and the relationship between advertising expenses and financial performance of companies. Three hypotheses on managers’ behaviour are stated - real need of normal spending (H1), spending to increase the prestige of the firm in financial markets (H2) and spending the free cash flows for the private benefit of managers (H3). The industry and company level data of publicly traded US companies in the period of 1995-2011 was collected from Compustat, Execucomp and OECD input-output tables. The main method of analysis was panel regression with fixed or random effects estimators. The models were also checked for Granger causality. Results provide support for all three hypotheses. This paper provides interesting directions for future research and contributes to the literature of agency problem between managers and shareholders.