“Wall Street does not ignore investments in advertising or the value of the brand; it’s reflected in stock prices. We can look at advertising as an investment in the health of the brand."

Firms that drop big dollars on advertising have increased stock returns, and new research may have pinpointed why. According to Assistant Professor Maria Ana Vitorino, advertising spending builds brand equity—the value of a firm, aside from its tangible assets—which boosts returns and firm value on Wall Street.

Vitorino uses economic theory to study how the value of a brand affects the financial value of a firm.

“Measuring brand equity is important for firms to understand what drives value beyond the balance sheet,” says Vitorino. “Firms can benefit from having a higher brand value in terms of higher recognition, more customer loyalty, future sales, and overall firm value.”

Vitorino gathered 28 years’ of data from hundreds of firms and found that a firm’s brand name accounts for roughly 23 percent of its market value, across all industries. For consumer-oriented firms specializing in clothing, food, or packaged goods, up to 60 percent of the market value is attributed to the value of the brand.

While existing research confirms a distinct connection between advertising and firm value, Vitorino cautions that advertising spending does not drive dollar-for-dollar returns in stock value.

“It’s important for firms to know how advertising spending translates into the value of a brand, but we see that there are misconceptions about how these things are related,” she says. “Just because we invest in advertising doesn’t necessarily mean we will see an abnormal increase in brand value, or in firm value.”

Her research shows that firm value increases are not driven solely by advertising because, on average, firms tend to advertise more when their overall business prospects are good. For example, when a brand introduces a new product, it will develop advertising to share the news. Naturally, because of the good health of the firm, these will be periods in which increases in market value will take place.

Watch Vitorino describe her findings:

 

“Understanding the Effect of Advertising on Stock Returns and Firm Value: Theory and Evidence from a Structural Model” Vitorino, Maria Ana, Management Science (2014)