Author Abstract
Combining new, hand-collected data with a widely studied dataset, we examine how firms use marketing actions to manage reported earnings. In contrast to prior literature that suggests firms reduce marketing expenditures in order to boost reported earnings, we find that soup manufacturers roughly double the frequency of all marketing promotions (price discounts, feature advertisements, and aisle displays) at the fiscal year-end and that they engage in similar behavior following periods of poor financial performance. In addition to offering promotions more frequently, we find that firms offer deeper price discounts to manage earnings during these periods. Furthermore, our results confirm managers' stated willingness to sacrifice long-term value in order to smooth earnings (Graham, Harvey and Rajgopal, 2005). We estimate that marketing actions can be used to boost quarterly net income by up to 20% depending on the depth of promotion. But there is a price to pay, with the cost in the following period being 23.5% of quarterly net income. Finally, a unique aspect of our research setting allows us to test who is responsible for the earnings management. While firms appear unable to increase the frequency of display promotions in the short run, they can reallocate these promotions within their portfolio of brands. We find that firms shift display promotions away from smaller revenue brands and toward larger ones following periods of poor financial performance, indicating the behavior is being driven by parties higher in the firm than the brand managers. Please visit Craig Chapman's homepage.
Paper Information
- Full Working Paper Text
- Working Paper Publication Date: February 2008, revised December 2009
- HBS Working Paper Number: 08-073
- Faculty Unit(s): Marketing; Accounting and Management