The Costs of Cutting Advertising to Manage Earnings: Evidence from the Survival of Newly Launched Trademarks

Abstract

Using the newly available U.S. trademark dataset to measure the lifespan of new brands, we find that new brands’ survival rate significantly declines following managers’ myopic cuts in marketing budgets. This evidence is consistent with concerns raised by marketing managers that firms’ brand innovation is being sacrificed in order to manage reported earnings to meet short-term earnings targets. The observed effect is more pronounced for firms in industries where more resources are devoted to advertising expenditures and in more reputation-sensitive industries. Additional analyses show that the survival rate of new brands has a significantly positive impact on future sales growth and profitability, confirming the value-relevance of brand innovation and our findings about the detrimental effects of earnings management .