Academic journal article Asian Social Science

The Comparative Value Relevance of Donation and Advertising Expenditure before and after the Global Financial Crisis in Korea

Academic journal article Asian Social Science

The Comparative Value Relevance of Donation and Advertising Expenditure before and after the Global Financial Crisis in Korea

Article excerpt

Abstract

This paper investigates the comparative value relevance of donation and advertising expenditures before and after the 2008 global financial crisis in listed Korean stock markets between 2004 and 2011. To test whether the value relevance of donation and advertising expenditures is associated with the 2008 global financial crisis, this paper first divides its sample into pre- and post-December 31, 2007, periods and then divides those into several subgroups to observe value relevance changes according to the characteristics and conditions of listed firms in the Korean stock markets.

This paper's empirical results offer important evidence concerning the comparative changes in the value relevance of advertising and donation expenditures. First, advertising and donation expenditures have positive value relevance before and after the global economic crisis and show a positive association with firm value in every subsample group divided according to firm characteristics.

Second, the results show significant time-period differences in the value relevance of donation and advertising expenditures before and after the global financial crisis. The results also show that value relevance changes according to the circumstance and contexts of the firms (e.g., KOSPI vs. KOSDAQ, large vs. small and medium, high technology vs. low technology).

Keywords: advertising expenditure, donation expenditure, global financial crisis (CFC), firm value, value relevance

(ProQuest: ... denotes formulae omitted.)

1. Introduction

Myers (1977) and Ohlson (1995) assume firm value to be a function of measurable and immeasurable net assets. Measurable assets are usually published as tangible assets, and immeasurable assets, as intangible assets. For decades, many researchers have perceived the importance of intangible assets as a value-relevant factor, with most reporting the empirical results of studies on R&D investment.

Some of the early R&D investment studies document the significant value relevance of R&D investment. Later studies suggest, though, that R&D activity indeed has a positive impact on firm value (Griliches & Mairesse, 1984; Hirschey, 1982; Hirschey & Weygandt, 1985; Bublitz & Entredge, 1989; Chauvin & Hirschey, 1993; Sougiannis, 1994; Lev & Sougiannis, 1996; Hall, 1999; Choi & Jung, 2001; Chung & Cho, 2004; Luo, 2005; Ahn & Kwon, 2006). These studies inspired many countries, including Korea, to change their R&D investment practices from expensing to capitalizing.

However, many studies have been indifferent to other intangible assets such as donation and advertising expenditures. Advertising is the process of announcing merchandise, products, and corporate images to unspecified individuals to promote sales. Donation is the non-business activity of giving free gifts such as merchandise, products, and money to the needy for charitable purposes. Whether intended for business purposes or not, both expenditure types can enhance a firm's reputation.

Fombrun et al. (2000) and Sen and Bhattacharya (2001) show that donations have positive effects on financial performance dimensions such as sales. They also indicate that a firm's charitable activities can enhance the image of a firm's products and merchandise, thus enhancing its overall reputation and, ultimately, its value.

Other studies, such as Keller and Lehmann (2003), demonstrate the value relevance of advertising expenditure through the mechanism of the brand value chain model. They assume that advertising promotes a brand's image, which affects customers' buying motivation and eventually leads to higher firm value. Many studies have thus documented the significant value relevance of donation and advertising expenditures but have not treated them as capitalized items in financial statements; most countries' accounting rules demand the expensing of donations and advertising. Thus, accounting and finance research must focus on the possibility of capitalization. …

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