15 Finance-Marketing Interface

Market-based assets are: relational and intellectual.

Relational market-based assets are “outcomes of the relationship between a firm and key external stakeholders, including distributors, retailers, end customers, other strategic partners”. (Srivastava, Shervani, and Fahey 1998)

For example, brand equity = relational assets between firms and their customers, while channel equity - relational assets between firms and their channel partners.

Intellectual market-based assets are “the types of knowledge a firm possesses about the environment, such as the emerging and the potential state of market conditions and the entities in it, including competitors, customers, channels, suppliers, and social and political interest group.” (Srivastava, Shervani, and Fahey 1998)

Marketing actions (e.g, adverting, product innovation) can build long-term assets (e.g., brand equity, customer equity), in turn increase short-term profitability (e.g., increase marketing effectiveness for dollars spent on advertising) (Rust et al. 2004)

The Chain of Marketing Productivity (source (Rust et al. 2004))

Relationship between marketing and finance (Srivastava, Shervani, and Fahey 1998)

Stage 1: Market-based Assets

  • Customer relationships: Brands, installed base.
  • Partner Relationship: channels, co-branding network.

Stage 2:

  • Faster Market penetration
  • Price premium
  • share premium
  • extensions
  • reduce sales/service costs
  • Loyalty/ Retention

Stage 3: Shareholder value:

  • Accelerate Cash Flows
  • Enhance Cash Flows
  • Reduce Volatility and Vulnerability of Cash flows
  • Enhance Residual Value of Cash Flows.

(Grewal, Chandrashekaran, and Citrin 2010; McAlister et al. 2016; Morgan and Rego 2009) used Tobin’s Q in marketing research. since it is “forward-looking, risk-adjusted, and less easily manipulated by managers” (Wies et al. 2019). When probing factors affecting Tobin’s Q, it was suggested to control for \[Financial Leverage\],\[Cash flows\]


S. J. Anderson, Chandy, and Zia (2018) found that there is a significant improvements from increasing both business skills (marketing and finance). However, the pathway to improve profits from marketing skills is via growth focus (e.g., higher sales, more investments in products, and employees). The pathway to improve profits from the finance skills is via efficiency or cost focus. Hence, the recommendation is that marketing/sales skills have better fit for startups, while finance/accounting skills are more needed in mature companies.

Cheong, Hoffmann, and Zurbruegg (2021) found that advertising investments is not only beneficial in terms of customers, but also in terms of investors since it reduces stock price synchronicity (i.e., a firm stock price follows closely to its industry moving)

Lacka et al. (2021) define price impact as” the impact on the variance of stock price.” They estimate the permanent and temporary price impacts of the firm-generated Twitter content of S&P 500 IT firms: firm-generated tweets induce both permanent and temporary price impacts, depending on valence and subject matter. Tweets reflecting only valence or subject matter concerning consumer or competitor orientation onlly have temporary price impacts, while those with both attributes generate permanent price impact. Moreover, negative valence tweets about competitors generate the largest permanent price impacts.


15.1 M&A

Umashankar, Bahadir, and Bharadwaj (2021) found that M&A decreases customer satisfaction that cannibalize firm value despite potential efficiencies (due to a shift by executives from customers attention to financial issues). The presence of marketing experts in upper echelons can mitigate this negative effect. Customer dissatisfaction with M&As might offset any synergy and efficiency advantages.

15.2 Stock Return Response Modeling

Valuation model

\[ MarketCap_{it} = \sum_{T = t}^\infty (\frac{1}{1 + r_{it}})^{T-t} E(CF_T) \]

Equivalently,

\[ MarketCap_{it} = (1 + Eret_{it}) MarketCap_{it-1}+ \sum_{T=t}^\infty (\frac{1}{1+r_{it}})^{T-t} \Delta E(CF_{iT}) \]

where

  • \(Eret\) = expected rate of return for an asset

  • \(\Delta E(CF_{iT})\) = change in the expected cash flows

Hence, the stock return can be written as

\[ StockReturn_{it} = \]