How do marketing decisions impact market share and firm value?

Abstract

This paper combines the ‘chain-of-effects’ framework for marketing productivity with agency theory to explore the underlying mechanism that drives the effects of marketing decisions (measured by marketing expenses and relative compensation for executive directors with marketing experience) on firm value (Tobin’s Q) via firm performance (market share). Data from 491 Chinese listed companies shows that marketing expenditure positively affects firm value but not through market share, whereas relative compensation positively affects firm value, both directly and through market share. The positive effect of relative compensation on market share is weaker for firms with higher marketing expenses and stronger for firms with more severe agency conflicts (e.g., state-owned firms). Interestingly, market share has a negative effect on firm value that is stronger for firms faced with higher market concentration (Herfindahl index). Besides extending research on the impact of marketing decisions on financial performance (e.g., firm value), these results provide useful directions to firms on how to manage this relationship.