Stock Market's Influence on Marketing and R&D Budgets: Implications for Short Term and Long Term Firm Performance
Open Access
- Author:
- Chakravarty, Anindita
- Graduate Program:
- Business Administration
- Degree:
- Doctor of Philosophy
- Document Type:
- Dissertation
- Date of Defense:
- June 09, 2010
- Committee Members:
- Rajdeep Grewal, Dissertation Advisor/Co-Advisor
Rajdeep Grewal, Committee Chair/Co-Chair
Gary L Lilien, Committee Member
Min Ding, Committee Member
Timothy Grant Pollock, Committee Member
Kalyan Chatterjee, Committee Member - Keywords:
- Firm Risk
Marketing -Finance
Marketing-R&D - Abstract:
- Marketing and R&D investments create intangible assets whose financial value is appropriated over time in the form of accelerated cash flows and persistent revenue streams. In theory, managers are expected to be rational. Therefore, managers should determine marketing and R&D budgets keeping an organization’s long term competitive advantage in consideration. My thesis is inspired by marketing and R&D budget allocation behavior that seems to deviate from theoretical rational expectations models in the following manner. Public firms have to convince investors of their potential for generating shareholder value in the form of earnings growth at short term intervals of a fiscal quarter or year. Consequently, in order to show earnings growth at short term intervals, managers may reduce spending on marketing and R&D activities or re-shuffle budgets between marketing and R&D activities in a manner that inflates short term earnings. Managers are able to justify such budgetary changes because the metrics for capturing the immediate and long term penalties for such changes are not clear. In the context of high technology industries, my first dissertation essay provides theoretical predictions and empirical evidence that historic stock price behavior influences firms to shift budget allocation emphasis from R&D to marketing activities such as sales promotions. In the process, even though organizations inflate yearend earnings, they incur opportunity costs in the form of foregone profits. In the context of manufacturing firms, my second dissertation essay provides theoretical predictions and empirical evidence that organizations make unscheduled cuts in marketing and R&D budgets in order to meet or beat analyst earnings forecasts towards the end of a fiscal year. Even though there are no immediate penalties, such budgetary reductions gradually increase stock return volatility over time and weaken organizational defense against stock market downturns.