Abstract
This paper investigates the nonlinear value relevance of advertising expenses in firms listed on Korean stock markets from 2003 to 2011. This study also categorizes the sampled data into several groups to examine the value relevance function of advertising expenses. The empirical findings of this paper show that advertising expenses has an inverted U-shaped relationship with enterprise value in various subgroups belonging to KOSPI markets, big firms, small and medium firms, and low technology firms classified by Himmelberg and Petersen (1994). The empirical results also provide the evidence that advertising expenses is nonlinearly associated with enterprise value with a U-shaped function in total sample firms, KOSDAQ firms, high technology firms classified by Himmelberg and Petersen (1994), and the high and low technology firm groups divided by R&D intensity.These results support the hypothesis of this study (H: Advertising expenses has nonlinear value relevance in Korean stock markets). The empirical findings of this study reveals that the value relevance shape of advertising expenses differ in accordance with the characteristics of individual firms.
Highlights
Advertising is generally defined as the cost that companies bear to promote their products and services or benefits of doing business to an unidentified public
The empirical findings of this paper show that advertising expenses has an inverted U-shaped relationship with enterprise value in various subgroups belonging to KOSPI markets, big firms, small and medium firms, and low technology firms classified by Himmelberg and Petersen (1994)
The empirical results provide the evidence that advertising expenses is nonlinearly associated with enterprise value with a U-shaped function in total sample firms, KOSDAQ firms, high technology firms classified by Himmelberg and Petersen (1994), and the high and low technology firm groups divided by R&D intensity
Summary
Advertising is generally defined as the cost that companies bear to promote their products and services or benefits of doing business to an unidentified public. Some studies report that donation expenses is positively related to enterprise value (Cochran & Wood, 1984; Posnikoff, 1997; Lev et al, 2006), while others find that donation expenses has no significant relationship with enterprise value, and even that it has negative value relevance (Wright & Ferris, 1997; Welch & Wazzan, 1999) These contradictory results motivated some researchers to document the value relevance of donation expenses using different valuation concepts. They document that donation expenses has positive value relevance until it reaches a particular threshold after which it causes enterprise value to decrease rather than increase. They recognize the relevance shape of donation expenses and enterprise value is not linear but nonlinear dynamics (an inverted U-shape). The last section summarizes the study and suggests implications to future researches
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