Keith W. Chauvin and Mark Hirschey of the University of Kansas perform research on the effect of advertising and research and development expenditures on the market value of a firm. Current literature finds capital expenditures and termination of poor investments to have a positive impact on firm value while plant closures and liquidations have a negative impact. Research has also shown that a large factor to firm value is an announcement of a company to invest more in research and development. Chauvin and Hirschey’s research expands on this previous research and determines the cross-sectional impact of advertising and R&D expenditures on firm value.
II. Theoretical Analysis
Chauvin and Hirschey primarily segmented their data by industry and size. With a COMPUSTAT data export, the researchers found that advertising is especially high in the educational and miscellaneous manufacturing industry while it is especially low in the heavy manufacturing industry. They also found that R&D spending is highly concentrated in the technology, industrial, and chemical industries but R&D spend is low in service sectors and retail. However, with few exceptions, companies rarely had both high advertising and R&D expenditures. High spending in both was seen mostly in larger firms as budgets tended to be higher in those firms. By analyzing the data across industries, the researchers were able to study this cross-sectional impact of advertising and R&D spending on the value of a firm.
III. Empirical Framework
The majority of the data used in this research was compiled using COMPUSTAT over a three year period across 1500 firms per year. The researchers split the data according to two factors: industry (manufacturing/nonmanufactu...
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...xpenditure was significant in large and medium firms.
Advertising and R&D expenditures are forms of intangible capital that add value to a firm. Chauvin and Hirschey found that along with other factors, R&D and advertising expenditures have a positive relationship on firm value. The researchers found that there is also a difference in the effectiveness of R&D and advertising in relation to the size of the firm. Because R&D and advertising have been proven to add value to a firm, they can be thought of as investments rather than expenditures. The effectiveness of each also relates to the size and industry of the firm. Understanding what affects the value of a firm as well as what other factors influence the market value (industry and size) is important for any business and in any industry and is relevant to shareholders, analyst, and investors, alike.
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