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Stock Market Valuation of the Tradeoff Between R&D and Advertising Intensities During an Economic Downturn
Ahmed Ebrahim, SUNY New Paltz
Surinder Tikoo, SUNY New Paltz
ABSTRACT. This paper examines the association between stock returns and earnings changes of firms that have made different tradeoffs with respect to R&D and advertising spending during an economic downturn. During the 2000-2002 bear market that was associated with the most recent economic downturn in the U.S. economy, we find the coefficient that relates stock returns and earnings changes to be significantly greater for firms that increased their advertising expenditures and decreased their R&D expenditures than for firms that increased their R&D expenditures and decreased their advertising expenditures. Our results suggest that investors perceive that an increased emphasis on advertising can enable firms to prevent erosion in earnings that can potentially occur during an economic downturn.
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