Microsoft Word 2007 ichrie conference Proceedings Final-Final 06-06-07. doc

 
RESEARCH DESIGN 
To answer the research question, we employed an earnings components approach adapted from Lipe (1986) 
and Bublitz and Ettredge (1989). Lipe (1986) examined the association between cumulative abnormal returns (CAR) 
and the forecast errors of six components of earnings, using annual data on gross profits, general and administrative 
expense, depreciation, interest expense, income taxes, and other items. He found that the component forecast errors 
were able to explain more of the variation in CAR than earnings forecast errors alone, and he concluded that some 
information was lost when the six components were aggregated into one single earnings number. The market 
reaction to an unexpected change in an earnings component, which is accompanied by a change in the level of an 
investment, depends on whether the market evaluates the investment as a positive net present value project. We, 
therefore, make explicit use of this line of reasoning to investigate whether marketing expenditures can be best 
characterized as investments or mere expenses in the hospitality industry. The association of per-share marketing 
“forecast errors” with CAR should differ to some extent depending on whether all benefits of marketing are 
reflected in current versus future periods.
Following Bublitz and Ettredge (1989), we consider a firm that makes an unexpected cash outlay that will 
yield cash inflows in the same and/or future periods. The market value of the firm increases in an amount equal to 
the present value of current period and expected future cash from the project but decreases by the amount of the cash 
outlay. Therefore, the net change in the value of the firm, reflected in its periodic stock return depends upon the 
project’s net present value. Assume for simplicity a setting in which accounting revenues and expenses correspond 
to cash flows. Let 
Pi,t
= the per-share price of firm 
i
at time 
t
, 
SFEPS
i,t
= the per-share sales forecast error (unexpected cash inflow) for the period ending at time t, 
MFEPS
i,t
= the per-share marketing forecast error (unexpected cash outflow) for the period, 
OEXFEPS
i,t
= the per-share forecast error (unexpected cash outflow) for expenses other than marketing, and
Z
i,t
= the present value of future period cash inflows arising from the marketing forecast error. 

---