Financial Markets and Marketing: The Tradeoff between R&D and Advertising during an Economic Downturn

Surinder Tikoo

State University of New York at New Paltz

Ahmed Ebrahim

Dolan School of Business, Fairfield University

INTRODUCTION

During an economic downturn, investors pressure firms to closely evaluate and change discretionary expenditures (Srinivasan, Rangaswamy, and Lilien, 2005). We do not know, however, how investors respond to changes in discretionary expenditures that firms make during an economic downturn. This study examines investor response to relative changes in the key discretionary expenditures of research and development (R&D) and advertising that firms made during an economic downturn. Specifically, we compare the coefficient that relates stock returns to changes in earnings for firms that, during an economic downturn, increase their R&D expenditures and decrease their advertising expenditures with firms that decrease their R&D expenditures and increase their advertising expenditures.