published_or_final_version / Public Health / Master / Master of Public Health

published_or_final_version / China Development Studies / Master / Master of Arts in China Development Studies

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Marketing managers are often challenged to show, in the language of finance, that marketing expenditures enhance financial performances. Responding to this call, the first essay examines the impact of a firm's advertising and research and development (R&D) on the systematic risk of its stock, a key finance metric for publicly listed firms. Integrating developments in the accounting, finance, and marketing literatures, we propose that both a firm's advertising and R&D will create market-based assets that will insulate the firm from changes in the stock market, thereby lowering its systematic risk. After controlling for factors that accounting and finance researchers have shown to be associated with the systematic risk, we find that a firm's advertising and R&D lower its systematic risk. For theory, the findings extend prior research that has focused on the effect of marketing initiatives on performance metrics without consideration of the impact of those initiatives on the firm's systematic risk. For practice, the ability of advertising and R&D to reduce systematic risk highlights the multi-faceted financial implications of marketing programs. This study's findings may also surprise senior management and finance executives who are skeptical of the financial accountability of marketing programs. In the second essay, we extend the existing literature to identify a fundamental signal from advertising (S[subscript ADV]) which the stock market and financial analysts might recognize as value-relevant information. We find that increases in the proposed advertising signal increase the cumulative abnormal stock returns (CAR) after controlling for the accounting and finance variables known to affect CAR. However, surprisingly, we find that the value-relevant advertising signal (S[subscript ADV]) is not related to financial analysts' expectation of firm value and their earnings forecasts, and that S[subscript ADV] increases the errors in analysts' earnings forecasts. We thus provide empirical evidence that analysts under-react to the fundamental advertising signal, S[subscript ADV], despite the fact that the measure is impounded in firms' stock prices. With the findings, this study joins a growing literature that demonstrates a link between marketing and financial value of a firm, and furthermore encourages finance professionals' better understanding of marketing accountability. / text

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This item was digitized as part of the Million Books Project led by Carnegie Mellon University and supported by grants from the National Science Foundation (NSF). Cornell University coordinated the participation of land-grant and agricultural libraries in providing historical agricultural information for the digitization project; the University of Arizona Libraries, the College of Agriculture and Life Sciences, and the Office of Arid Lands Studies collaborated in the selection and provision of material for the digitization project.

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This dissertation has two objectives. The first is to provide a framework for understanding strategic interactions between an auditor and investors in a competitive rational expectations economy. The second is to provide a welfare analysis of auditor litigation in a costly legal environment. We present a model which captures the following aspects: (i) investors in a competitive capital market form rational expectations about their future litigation opportunities against auditors; (ii) auditors compete for potential clients, and they strategically consider the threat of litigation; (iii) the audited firm's production decision depends on audit quality; and (iv) trial is a costly process, and litigants have settlement opportunities. The market price of the firm and audit quality are endogenized. The welfare analysis provides a rationale why society maintains a legal system which provides an incentive for the investors to recover their ex post financial loss from the auditor through a costly legal process, even if they can price-protect themselves ex ante with or without such a mechanism. We interpret the court system as a decentralized disciplinary mechanism for the auditor moral hazard problem, which enables the potential auditee to use an auditor as a commitment device. We examine the economic consequences of legal policies which potentially influence the size of legal costs. When audit failure is clearly defined, an increase in the auditor's legal costs decreases social welfare. An increase in the investors' legal costs has a more complex impact on the actions of economic agents upon which the social costs and benefits of an audit crucially depend. We also study the economic impact of a change from an American to a British rule of allocating legal costs, which was recently proposed by the accounting profession in the U.S. In contrast to the practitioners' common belief, we demonstrate that the British rule might increase the frequency of lawsuit. Therefore, regulators must be very careful in evaluating the accountants' proposal of the British rule, and it should not replace the American rule unless a careful analysis indicates that the net benefit of audits under the British rule is larger than that under the American rule.