Is Value Associated with Initiating New Advertising Agency-Client Relations?

Abstract

Abstract A variety of factors motivate firms' managers to initiate new relations with advertising agencies. Principal among the factors is the desire to improve the firm's financial performance. The authors examine whether initiating new relations results in a change in the market value of the firm, that is, whether there is a wealth effect. Three situations involving new relations are studied: a firm's announcement that a new account is established with an advertising agency, a firm's announcement that a new account is established with an agency already linked to the firm, and a firm's announcement that a new account is established for a new business activity by the firm. One overall sample and three subsamples corresponding to the three situations were compiled for analysis. The results for the overall sample show significant negative wealth effects associated with the announcements of new agency-client relations. Similarly, negative wealth effects are observed for the first subsample. However, significantly positive wealth effects are observed on a delayed basis for the second subsample (announcements of new accounts with agencies already linked to the firms) and for the third subsample (announcements of new accounts for new activities). Announcements associated with more prestigious agencies resulted in more positive wealth effects. Finally, announcements by firms with relatively poor financial performance were associated with relatively lower wealth effects. Possible managerial implications of the results are discussed.