In this study, we use these indicators to specify the role of debt in firm valuation. These different interpretations of debt by investors lead to different implications for company performance. To reconcile the limitations of trade-off theory, we use signaling theory to account for the multiple meanings of debt in the firm's valuation process.
Given the roles of debt in both the internal and external financing phases, we therefore assume a U-shaped relationship between financial leverage and corporate valuation. The roles of marketing in the relationship between financial leverage and company valuation 2.4.1. Marketing as a means of taming the polysemous signals of debt.
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Methodology 1. Data
- Variable Operationalization
- Independent Variables
- Control Variables
- Model Specification
The calculated returns can be thought of as annual total stock returns, after taking into account the overall performance of the market from the investor's perspective. The financial leverage ratio is defined as the ratio of debt to the company's total assets. To be consistent with our assumption that financial leverage has a non-monotonic effect on company valuations, we also include the second-order term of leverage in the analysis.
Although some scholars have operationalized marketing intensity as the difference between R&D expenses (data item 46) and SG&A (data item 132) relative to asset ratio (Mizik 2010; Mizik and Jacobson 2007; Luo 2008), we use sales as a measure of income. Our set of control variables includes size, capital expenditures, revenue, market-to-book ratio, industry average assets, industry concentration, industry-adjusted market share, age and the company's previous valuation. Capital expenditure is defined as the amount of money spent to acquire and maintain a company's physical assets.
We also control for firm age because longer existence in the market may reflect solid market share for the firm's product as well as value through the firm's built reputation and stability. Industry average assets have been considered an exit barrier in studies of diversification strategies (Robins and Wiersema 1995), but they also affect firm performance when the firm perceives industry-level assets as a sunk investment. Industry concentration is defined as the sum of the squares of the market shares of each firm in the industry, with market share calculated by dividing the firm's sales by the total sales in the industry.
Market share, calculated as the share of an individual company's turnover in relation to total sector turnover, indicates that the higher the share, the greater the impact of innovations on company value (Tsai 2006).
RESULTS
We predict that the positive coefficient on the second-order term of leverage will be consistent with our prediction of a U-shaped relationship between financial leverage and firm valuation. All independent variables are lagged one year to predict the future valuation of the firm and also to avoid the issue of reverse causality. We expect to see a positive effect of marketing spend, with a back-up effect from marketing moderation.
In concrete terms, we expect a negative moderating effect from marketing, after an initial positive moderating effect.
CAPEXValuation
Financial Leverage and Firm Valuation
We find a U-shaped relationship between leverage and Tobin's q, as the linear effect of leverage on firm valuation is negative (β = -0.727; p < 0.050) and the quadratic effect of leverage on firm valuation is positive. (β = 1.557; p < 0.001). Here we find that the valuation of the company decreases with increased leverage until the debt-to-equity ratio reaches approximately 30%.
Moderation of Marketing Intensity
The minimum value of Tobin's q at the inflection point increases as the moderating effect of marketing increases further. This means that marketing activities can alleviate the negative impact of low internal resources on firm valuation and can simultaneously enable the firm to reap the benefits of financial leverage (through debt financing). Furthermore, in Figure 4, we see that firm valuation is more sensitive to the effect of marketing activities at modest levels of financial leverage.
That is, the difference in Tobin's q according to marketing activities increases when financial leverage remains moderate, i.e. this indicates that the benefits of marketing intensity can be maximized when financial leverage is modest. When financial leverage is too low, which means that the focal company is signaled as suffering from financing itself (struggles between internal financing and external financing), marketing intensity can worsen the company's financials.
On the other hand, when the financial leverage is too high, meaning that the focus company is being signaled as growing (i.e. it is choosing between debt and equity financing), the signal of high financial leverage itself can change the status of the focus company. declare as prosperous. . The financial leverage information allows investors to determine whether the company the company is focusing on is doing well. The negative meaning (i.e. financial distress) and the positive meaning (i.e. growth opportunity) are confused under the modest level of financial leverage.
In this situation, marketing activities can play a key role in reinforcing the positive meaning of financial leverage, thereby persuading investors to value the company's activities.
Robustness Checks and Alternative Explanations
Since firms do not publicly report marketing expenditures, most studies on the relationship between firm value and marketing have considered advertising spending as a proxy for marketing expenditures. The results of this robustness test are shown in Model 2 in Table 5.2 With respect to Model 2, the negative coefficient of an interaction term of advertising intensity and financial leverage on Tobin's q (β p < .001) and the positive coefficient of the interaction term of advertising intensity and the quadratic term of financial leverage (β = 0.691; p < .001) supports the positive moderating effect of advertising spending on firm valuation. BHARs (Buy-and-Hold Abnormal Returns) are used to represent the firm's performance in the financial market, where the returns are calculated as the market's performance.
Consistent coefficients on financial leverage, marketing intensity, and the moderating effect of marketing allow us to conclude that our results are robust against alternative measures of firm valuation. We also find a persistent pattern between our alternate dependent measure of BHARs and advertising intensity, the alternate measure of marketing intensity.3. To further verify that the curvilinear relationship between financial leverage and Tobin's q, as well as the moderating effect of marketing intensity, are robust, we use distinctive but legitimate alternative independent variables.
For our first set of alternative variables, we adjust financial leverage and marketing intensity according to industry averages, using Standard Industrial Classification (SIC) codes. 2 Model 2 in Table 4 performs the full model specification, with advertising intensity as an alternative measure of marketing intensity. 3 Models 3 through 4 in Table 4 estimate the full model specification, using the alternative dependent measure of business performance BHARs for the robustness check.
Since this ratio represents a company's capital structure and directly measures how much debt is used compared to equity, we expect results consistent with leverage, which is the ratio of debt to assets.
DISCUSSION
- Substantial Cost vs. Strategic Signal
The implication of debt signaling is that companies can strategically determine their level of debt in order to influence how investors or other stakeholders assess the company's status. If debt is viewed solely as a cost, the strategic use of debt may not make sense because it would be unthinkable for a company to issue a large amount of debt. It means companies can strategically choose to hold higher levels of debt to boost their valuation.
To make strategic debt retention more effective, marketing activities can play a crucial role. As discussed above, the effect of financial leverage should be understood as a signaling process, which is predominantly interpretive. Given that marketing activities can influence whether stakeholders perceive a company as of good quality and can improve a company's financial performance in an adverse situation, these activities can be used strategically to improve the debt signaling process.
Specifically, companies can increase their value with marketing activities if leverage is viewed as a growth signal, and they can reduce investors' aversion to bankruptcy risk if leverage is viewed as a distress signal. The contribution of this work to the literature examining the impact of marketing activities on firm valuation is that we look specifically at the role of marketing intensity in relation to different levels of financial leverage. The positive moderating effect of marketing confirms that marketing activities can be used as a strategic tool to improve company valuation.
CONCLUSION
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