A PolyU study has found that restaurant advertising may increase not profits but total and firm-specific risk.
The usual presumption is that effective advertising increases the profitability and intangible assets of listed restaurant firms, such as brand equity and customer awareness, thus increasing stock returns. However, a recent study has shown that restaurant firms’ advertising expenditure can counter-intuitively increase their total and firm-specific risk.
Dr Kim YongHee at PolyU’s School of Hotel and Tourism Management partnered with Dr Kim MinChung at the Faculty of Business and a researcher from Pennsylvania State University to investigate advertising efficacy in US publicly listed restaurants.
The researchers collected and analyzed the financial report and daily stock return data of 89 firms over the 1982-2008 period, obtaining 575 usable firm-year observations. Key considerations in analyzing the data included the extent of resource allocation on advertising, firm size, the extent of leverage and ability to repay debts, return on assets and market-to-book ratio.
The results showed that advertising expenditure was significantly related to total risk (variation in historical stock returns) and firm-specific unsystematic risk (product or service defects affecting stock returns), but not market-level systematic risk (caused by economic factors such as recessions, inflation or interest rate changes). As the researchers put it, the stock market does not consider promotion-based advertising as capable of building firm equity. Indeed, expenditure on sales promotion or price-oriented media advertising could actually increase unsystematic risk for firms focusing on short-term results. The researchers thus recommended that restaurant firms shift their advertising focus from price competition and sales promotion to product differentiation.
The findings of this study provide listed restaurant firms with a better understanding of the effectiveness of their current advertising campaigns in terms of risk reduction. ♦