Dr. Catherine Ha-Lim of the College of Business presented her paper titled “Long-Term and Short-Term Dynamic Interactions among Advertising and R&D Expenditures, Brand Equity, Cash Flows, and Firm Risk.” to students and faculty members on Sept 28th. In her paper, Professor Ha-Lim analyzes the interactions among marketing, financial factors and other elements of firm performance in the long term as well as in the short term. She finds that Advertising, Marketing and R&D investments drive long term firm valuation. She also examines the feedback loops where the resulting brand equity appreciation also increases cash flows which lowers financial risk.
Read the abstract to Dr. Ha-Lim's paper:
To identify the structural behavior among marketing and financial factors and their dynamic interactions in the long term as well as in the short term is one of the most crucial issues in marketing. Making use of the panel vector autoregressive (VAR) model and orthogonalized impulse response analysis, this study seeks to assess the effects of marketing programs and brand equity on cash flows and firm risk as well as the feedback effects of cash flows and firm risk on marketing factors both in the long run and in the short run. The authors provide empirical evidence of a link between marketing investments and brand value generation and find feedback loops where advertising and research and development (R&D) expenditures and resultant brand equity increase cash flows and lower risk. The improved cash flows increase investments in R&D and advertising, enhancing brand value, which leads to a higher level of future-term cash flows, while the decreased risk induces a higher level of brand equity and as a result, lowers the level of risk in the future. A high level of risk makes a manager invest more in R&D in the short run, which increases brand equity and reduces future-term risk, while an unexpected increase in risk lead to decreases in R&D and advertising expenditure in the long run. The authors also find that the effect of a brand equity shock on firm value reaches a peak immediately and vanishes slowly, whereas that of an R&D shock reaches its peak and dies out quickly, and that of advertising shock reaches a peak and decays slowly. These findings allow managers to capture the marketing mechanisms and establish a tactical resource allocation.