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

 
2007 Annual International CHRIE Conference & Exposition 
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managers as well as investors to improve their decision making processes and to identify the optimal level of 
marketing investments.
 
LITERATURE REVIEW 
The first value relevance of marketing investments in the accounting literature is dated back to 1967 
(Bublitz and Ettredge, 1989). Comanor and Wilson (1967) provided early evidence that advertising intensity was a 
useful proxy for product differentiation and entry barriers. Empirical studies have investigated the relationship 
between marketing outlays and future earnings in order to assess the validity of FASB’s position of expensing these 
outlays. Bubblitz and Ettredge (1989) and Hall (1993), for example, found that the impact of marketing is limited to 
an average of two years. Therefore, from an accounting point of view, marketing expenditures are short-term 
expenses and as such there is no rationale for capitalizing these expenses.
In the marketing literature, satisfied customers are considered economic assets that yield future cash flows 
(Fornell 2002, p. 41). The value of customer satisfaction goes beyond the current transaction as satisfied customers 
tend to be loyal and increase their firm-level expenditures over time (Anderson & Sullivan, 1993; Reicheld & 
Sasser, 1990; Gruca & Rego, 2005). Moreover, satisfied customers are likely to generate positive word-of-mouth, 
thus further increasing future cash flows (Anderson 1996). Recent marketing literature has also linked brand equity 
to firm value (e.g., Rao, Agarwal and Dahloff, 2004). In addition to a loyal customer base, strong brands tend to 
have high margins, licensing or franchising opportunities and increased marketing efficiency (e.g., Keller 1993). 
Hence, it is not surprising that financial markets have started to incorporate brands in their stock evaluations (e.g., 
Simon & Sullivan, 1993). The franchising aspect of strong brands is particularly important in the hospitality 
industry. Lovett and MacDonald (2005) suggested that product launch decisions, research and development, 
distribution choices and promotion plans influence financial market perceptions. Marketing scholars have also 
investigated the effect of marketing productivity on firm value. Rust et al. (2004) identified three challenges related 
to the measurement of marketing productivity. First challenge is relating marketing activities to long term effects, 
the second challenge is the separation of individual marketing activities from other actions, and third challenge is the 
use of financial methods alone to justify marketing investments. Rust et al. (2004) further suggested that evaluating 
the effectiveness of marketing productivity requires projecting the differences in the cash flows that will occur from 
the implementation of a marketing action. Lehman (2004) stated that finance and accounting alone can’t capture the 
majority of the firm’s value and consequently, marketing should be treated as an investment rather than an expense.