Effect of analysts’ earnings pressure on marketing spending and stock market performance

Abstract

Despite the clearly visible effects of analysts’ pressures on C-level executives in the popular press, there is limited evidence on their effects on marketing spending decisions. This study asks two questions. First, how do analysts’ pressures affect firms’ short-term marketing spending decisions? Based on a sample of 2706 firms during 1987–2009 compiled from Institutional Brokers Earning System, COMPUSTAT, and CRSP databases we find that firms cut marketing spending. Second, more importantly, we ask if firms which remained more committed in the past to marketing spending under analysts’ pressures have higher longer-term stock market performance. We find that the stock market performance of firms more committed to marketing spending under past periods of analysts’ pressures is higher. The findings are replicated for R&D spending and are robust across measures, controls, and methodologies. Consideration of two industry-based moderators, R&D spending and revenue growth, and one firm-based moderator, whether the firm is among the industry’s top four market share or other lower share firms, reveals that the findings are stronger for high R&D and growth industries and lower market share firms. One key implication is that top executives respond to analysts’ pressures by cutting marketing spending in the short term; however, if they can resist these pressures, longer-term stock market performance is higher.