Capital Market Impact of Product Marketing Strategy: Evidence From the Relationship Between Advertising Expenses and Cost of Capital

Abstract

To analyze the prospect of a firm’s advertising decision affecting shareholder wealth, this article investigates the relationship between a firm’s advertising expenditure and the market-imposed weighted average cost of capital. For a sample of U.S. firms, the results show that advertising expenditure is negatively related to the cost of equity and positively related to debt utilization, resulting in a lower weighted average cost of capital. A higher debt level, however, associates with a lower level of financial strength. In addition, and plausibly by lowering the cost of capital through product market advertising, firms with higher advertising expenditure experience higher performance in terms of market value added.