Market-Based Assets, Value Appropriation Activities, and Cash Flow Outcomes

179 Pages·2015·1.78 MB·English

ABSTRACT
Market-Based Assets, Value Appropriation Activities, and
Cash Flow Outcomes
by
Carly Frennea
Understanding marketing’s contributions to the financial performance of firms is
an important question for the field. A critical performance metric is cash flow
vulnerability, or the potential for downside cash flow outcomes relative to a target level.
In Essay One, I conceptually develop the cash flow vulnerability construct and
distinguish it from a seemingly related construct, cash flow volatility, by tracing their
unique nomological networks. I also provide a deeper examination of how market-based
assets reduce cash flow vulnerability. Specifically, I systematically describe the
mechanisms underlying the protective effect of two market-based assets—brand equity
and customer relationships—on cash flow vulnerability.
In Essay Two, my focus is on two value appropriation activities that support
brand equity and customer relationships—advertising and receivables management,
respectively. I examine how the incremental effect of advertising expenditures and
accounts receivable on cash flow outcomes is moderated by two contextual factors:
business scope (a firm characteristic) and consumer sentiment (an environmental
characteristic). I simultaneously explore three cash flow outcomes—levels, volatility, and
vulnerability. To test these relationships, I utilize a dataset composed of over 2,500 firms
from 1999 to 2013. I find that the incremental effect of advertising and receivables on
cash flow outcomes is contingent on business scope and consumer sentiment and provide
managers strategic prescriptions based on these findings. Specifically, (1) narrow
business scope firms can maximize cash flow performance via low levels of receivables;
high levels of advertising increase cash flow levels and decrease cash flow volatility, but
not cash flow vulnerability; (2) broad business scope firms can increase cash flow levels
and reduce cash flow vulnerability via low levels of advertising and receivables;
however, high levels of advertising and receivables are needed to reduce cash flow
volatility; (3) when consumer sentiment is low, firms can maximize cash flow
performance via low levels of advertising and receivables; and (4) when consumer
sentiment is high, no clear strategy emerges and firms must engage in trade-offs based on
their cash flow performance goals.
Acknowledgments
To my advisor, Vikas Mittal, without whom I never would have started a Ph.D.,
let alone finished one. For seven and a half years, you have shepherded me through two
graduate programs and provided me numerous opportunities to learn and evolve
academically and professionally. I am incredibly grateful for your selfless support and
guidance in matters big and small.
To my committee members, thank you for your guidance throughout this process
and willingness to work with me on a fairly aggressive timeline. Bob Hoskisson
welcomed me into his strategy seminar and provided a gateway into an unfamiliar
literature, one on which this dissertation partly relies. Fred Oswald provided the majority
of my statistics education (easily my favorite classes during grad school), and has been
nothing but enthusiastic and quick to provide feedback regarding my work. Thank you
for providing business school Ph.D. students a friendly “home away from home.” Chris
Moorman has worked with me on parts of this dissertation for four years and always
provided insightful, thoughtful, and critical commentary. Her feedback made my work
better.
To my fellow Jones School Ph.D. students, this experience would not have been
the same without you. Hanie, I never would have imagined before we started that I would
not only get along with the other people crazy enough to join a new program, but also
make a lifelong friend in the process. You have been an awesome study buddy, office
mate, and wing man these past six years. Nivriti, thank you for reviewing almost all my
work in the last two years and listening to me whenever I need to complain, celebrate, or
both. I have no doubt that you will enjoy great success as you complete the program.
v

To my family, each of whom has shaped my academic career. Dad, thank you for
telling me I could go to school for as long as I liked and supporting me immensely
throughout 12 years of higher education. (Sorry I actually took you up on the offer.) I am
grateful to have inherited your discipline and work ethic; thank you for providing me an
excellent role model in these regards. Mom, you instilled in me a love of reading that has
been instrumental throughout my pursuit of higher education, and has made me a more
curious and informed individual. I also thank you for being my sounding board whenever
I had to make a tough decision professionally or personally. To you both, I feel incredibly
fortunate that I was able to return home to Houston for graduate school, enabling us to
spend so much time together (especially if this ends up being my last year in Houston).
Kyle, thank you for being my first student and letting me know way back in adolescence
that I enjoyed bossing people around (I mean, teaching them something new). You are
the coolest little brother a girl could ask for and definitely have me beat in this whole
“growing up into a responsible adult” thing. Lee, I don’t know how I would have gotten
through these very tough last three years without you. I do know I would not have wanted
to. Thank you for your incredible patience throughout this process, especially as my extra
year meant putting a lot of life on hold. I am excited for our next chapter. To you all, I
couldn’t have done this without your support, assistance, and encouragement. I love you.
Table of Contents
Acknowledgments.............................................................................................................. iv
List of Figures .................................................................................................................. viii
List of Tables ..................................................................................................................... ix
List of Equations ................................................................................................................. x
Chapter 1: Introduction And Overview .............................................................................. 1
Essay One: The Defensive Nature of Market-Based Assets ......................................... 5
Essay Two: The Differential Impact of Value Appropriation Activities on Cash Flow
Levels, Volatility, and Vulnerability ............................................................................ 8
Dissertation Contributions .......................................................................................... 12
Theoretical Contributions ..................................................................................... 12
Managerial Contributions ..................................................................................... 13
Chapter 2: The Defensive Nature of Market-Based Assets .............................................. 15
The Nature Of Cash Flow Vulnerability ..................................................................... 18
Conceptualizing Cash Flow Vulnerability ............................................................ 18
Contrasting Cash Flow Vulnerability And Volatility ........................................... 19
Market-Based Assets and Cash Flow Vulnerability ................................................... 25
Brand Equity ......................................................................................................... 26
Customer Relationships ........................................................................................ 38
General Discussion ..................................................................................................... 48
Theoretical Contributions ..................................................................................... 48
Managerial Implications ....................................................................................... 50
Future Research Directions ................................................................................... 51
Conclusion ............................................................................................................ 54
Chapter 3: The Differential Impact of Value Appropriation Activities on Cash Flow
Levels, Volatility, and Vulnerability ................................................................................ 55
Background And Literature Review ........................................................................... 61
Cash Flow Outcomes ............................................................................................ 61
Value Appropriation In Firms ............................................................................... 63
Hypothesis Development ............................................................................................ 69
Firm Business Scope ............................................................................................. 69
Consumer Sentiment ............................................................................................. 76
Methodology ............................................................................................................... 83
vii

Data Sources And Sample .................................................................................... 83
Dependent Variables ............................................................................................. 83
Independent Variables .......................................................................................... 89
Control Variables .................................................................................................. 91
Estimation Procedure ............................................................................................ 95
Results ......................................................................................................................... 97
Findings: Advertising Expenditures, Accounts Receivable, And Business Scope
............................................................................................................................. 101
Findings: Advertising Expenditures, Accounts Receivable, And Consumer
Sentiment ............................................................................................................ 107
Robustness Checks.............................................................................................. 113
General Discussion ................................................................................................... 122
Managerial Insights And Implications ................................................................ 122
Research Implications And Future Directions .................................................... 126
Limitations .......................................................................................................... 129
Conclusion .......................................................................................................... 130
Appendix ......................................................................................................................... 131
Appendix A: Antecedents and Consequences of Cash Flow Vulnerability and
Volatility ................................................................................................................... 131
Appendix B: Lower Partial Moment Specification .................................................. 144
Appendix C: Index of Consumer Sentiment Survey Questions................................ 147
References ....................................................................................................................... 148
List of Figures
Figure 1.1: Market-Based Assets and Cash Flow Vulnerability: Exploring the “Black
Box” .................................................................................................................................... 7
Figure 1.2: Conceptual Model of the Impact of Value Appropriation Activities on Cash
Flow Outcomes and the Moderating Effect of Business Scope and Consumer Sentiment
........................................................................................................................................... 11
Figure 3.1: Conceptual Model of the Impact of Value Appropriation Activities on Cash
Flow Outcomes and the Moderating Effect of Business Scope and Consumer Sentiment
........................................................................................................................................... 60
Figure 3.2: Index of Consumer Sentiment (1999-2013) ................................................... 92
Figure 3.3: Business Scope Moderates the Incremental Effect of Advertising and
Receivables on Cash Flow Levels .................................................................................. 104
Figure 3.4: Business Scope Moderates the Incremental Effect of Advertising and
Receivables on Cash Flow Volatility .............................................................................. 105
Figure 3.5: Business Scope Moderates the Incremental Effect of Advertising and
Receivables on Cash Flow Vulnerability ........................................................................ 106
Figure 3.6: Consumer Sentiment Moderates the Incremental Effect of Advertising and
Receivables on Cash Flow Levels .................................................................................. 110
Figure 3.7: Consumer Sentiment Moderates the Incremental Effect of Advertising and
Receivables on Cash Flow Volatility .............................................................................. 111
Figure 3.8: Consumer Sentiment Moderates the Incremental Effect of Advertising and
Receivables on Cash Flow Vulnerability ........................................................................ 112
List of Tables
Table 2.1: Market-Based Assets & Activities and Cash Flow Outcomes: Empirical
Findings............................................................................................................................. 17
Table 2.2: Contrasting Cash Flow Vulnerability and Volatility: Properties and Measures
........................................................................................................................................... 23
Table 2.3: Contrasting Cash Flow Vulnerability and Volatility: Antecedents and
Consequences .................................................................................................................... 24
Table 2.4: How Brand Equity and Customer Relationships Reduce Cash Flow
Vulnerability ..................................................................................................................... 37
Table 3.1: Construct Descriptions and Measurement ....................................................... 85
Table 3.2: Summary Statistics .......................................................................................... 87
Table 3.3: Correlation Matrix ........................................................................................... 88
Table 3.4: Cash Flow Level Regression Results .............................................................. 98
Table 3.5: Cash Flow Volatility Regression Results ........................................................ 99
Table 3.6: Cash Flow Vulnerability (Firm Target) Regression Results ......................... 100
Table 3.7: Robustness Check: Alternative Measure of Business Scope (Number of
Segments) ........................................................................................................................ 116
Table 3.8: Robustness Check: Alternative Measure of Business Scope (Percentage of
Foreign Sales) ................................................................................................................. 117
Table 3.9: Robustness Check: Alternative Measure of Business Scope (Industry
Dynamism) ...................................................................................................................... 118
Table 3.10: Robustness Check: Cash Flow Vulnerability (Industry Target) Regression
Results ............................................................................................................................. 119
Table 3.11: Summary of Hypotheses and Results .......................................................... 120
Table 3.12: Prescriptions for Value Appropriation Activities Based on Contingencies and
Cash Flow Performance Goals........................................................................................ 121
Table A.1: Number of Unique and Shared Predictors of Cash Flow Vulnerability and
Volatility ......................................................................................................................... 131
Table A.2: Predictors of Cash Flow Vulnerability and Volatility .................................. 133
Table A.3: Consequences of Cash Flow Vulnerability and Volatility............................ 143
List of Equations
(3.1) Cash Flow Vulnerability .......................................................................................... 84
(3.2) Entropy .................................................................................................................... 90
(3.3) Cash Flow Outcomes (Level 1 Model) .................................................................... 95
(3.4) Cash Flow Outcomes (Level 2 Model) .................................................................... 96
(3.5) Cash Flow Outcomes (Combined Model) ................................................................ 96