Sunk Cost Dilemma Behavior: The Contribution Marketing Expenses towards Financial Performance

Gesti Memarista, Lila Gestanti

Abstract


Marketing expenses can drove the financial performance of a company, but sometimes it was only a sunk cost. The sunk cost dilemma behavior can confuse a financial manager, confounding decisions about whether to invest in marketing. Thus, this study aimed to explain the relationship between marketing expenses and profitability. The research subjects were manufacturing firms listed on the Indonesia Stock Exchange between 2012 and 2016. The results showed that marketing-related research and development expenses, selling expenses, and operating cash flow had a significant positive relationship with return on assets (ROA) and return on equity (ROE). Moreover, lagged research and development expenses—specifically, expenses from the previous four years (RnDt-4)—had a significant effect on ROA and ROE. Leverage had a significant negative effect on ROA and ROE. On the other hand, firm size had no significant impact on profitability. The findings showed that marketing expenses were not a sunk cost; they were an investment that leads to good financial performance. Greater investments in marketing expected to entice consumers bought a company’s products and created more profitability, leading to improved financial performance.

JEL Classifications: L25, M31, M37

DOI: https://doi.org/10.26905/jkdp.v22i4.1871


Keywords


Financial Performance; Lagged Research and Development Expenses; Marketing Expenses; Sunk Cost Dilemma Behavior

Full Text:

PDF

References


Alarussi, A. S., & Alhaderi, S. M. (2017). Factors affecting profitability in Malaysia. Journal of Economic Studies, 45(3), 442-468. https://doi.org/10.1108/JES-05-2017-0124

Ali, A., Klasa, S., & Yeung, E. (2009). The limitations of industry concentration measures constructed with compustat data: Implications for finance research. The Review of Financial Studies, 22(10), 3839-3871. https://doi.org/10.1093/rfs/hhn103

Anderson-MacDonald, S. (2014). The impact of marketing (versus finance) skills on firm performance: Evidence from a randomized controlled trial in South Africa. Job Market Paper. London Business School.

Benson, B. W., & Davidson, W. N. (2010). The relation between stakeholder management firm value, and CEO compensation: A test of enlightened value maximization. Financial Management, 39(3), 929-963. https://doi.org/10.1111/j.1755-053X.2010.01100.x

Bhayani, S. J. (2010). Determinants of profitability in Indian cement industry: An economic analysis. South Asian Journal of Management, 17(4), 6-20.

Boadi, E. K., Antwi, S., & Lartey, V. C. (2013). Determinants of profitability of insurance firms in Ghana. International Journal of Business and Social Research, 3(3), 43-50.

Boboye, A. L., & Ojo, O. M. (2012). Effect of external debt on economic growth and development of Nigeria. International Journal of Business and Social Science, 3(12), 297-304.

Brigham, E. F., & Daves, P. R. (2009). Intermediate Financial Management. 10th Edition. South-Western: Cengage Learning.

Brooksbank, R., Subhan, Z., Garland, R., & Rader, S. (2015). Strategic marketing in times of recession versus growth: New Zealand manufacturers. Asia Pacific Journal of Marketing and Logistics, 27(4), 600-627. https://doi.org/10.1108/APJML-10-2014-0155

Brooksbank, R., Subhan, Z., & Miller, S. (2017). What differentiates successful strategic marketing among manufacturers in an emerging vs developed market? Asia Pacific Journal of Marketing and Logistics, 30(2), 309-332. https://doi.org/10.1108/APJML-12-2016-0251

Burja, C. (2011). Factors influencing the company’s profitability. Annales Universitatis Apulensis Series Oeconomica, 13(2), 215-224.

Castells, P. A., & Mohnen, P. (2012). Sunk cost, extensive research and development subsidies, and permanent inducement effects. The Journal of Industrial Economics, 63(3), 458-494. https://doi.org/10.1111/joie.12078

Chakraborty, V. L. G. (2015). Impact of consumers’ effort in investments on buying decisions. Journal of Consumer Marketing, 32(2), 61-70. https://doi.org/10.1108/JCM-08-2014-1090

Chiesa, V., Frattini, F., Lazzarotti, V., & Manzini, R. (2009). Performance measurement of research and development activities. European Journal of Innovation Management, 12(1), 25-61. https://doi.org/10.1108/14601060910928166

Damirchi, G. V., & Shafai, J. (2011). A framework to innovation in marketing management by utilizing business intelligence. Interdisciplinary Journal of Contemporary Research in Business, 3(2), 1643-1653.

Fung, M. K. (2009). Is innovativeness a link between pay and performance? Financial Management, 38, 411-429. Retrieved from: http://www.jstor.org/stable/40388678

Ganguli, S. K. (2016). Persistent high liquidity, ownership structure, and firm performance: Indian evidence. Corporate Ownership & Control, 14(1), 38-65. http://dx.doi.org/10.2139/ssrn.2255464

Global Business Guide Indonesia. (2015). Making Research & Development Part of Indonesia’s Vision for Growth. Retrieved from: http://www.gbgindonesia.com/en/education/article/2015/making_research_andamp_development_part_of_indonesia_s_vision_for_growth_11164.php

Grubb, M. D. (2009). Selling to overconfident consumers. American Economic Review, 99(5), 1770-1807. http://dx.doi.org/10.1257/aer.99.5.1770

Holak, S. L., Parry, M. E., & Song X. M. (1991). The relationship of R&D/sales to firm performance: An investigation of marketing contingencies. Journal of Product Innovation Management, 8: 276-282. https://doi.org/10.1016/0737-6782(91)90048-4

Konak, F. (2015). The effect of marketing expenses on firm performance empirical evidence from the BIST Textile, Leather Index. Journal of Economics, Business, and Management, 3(11), 1068-1071. https://doi.org/10.7763/JOEBM.2015.V3.335

Kotler, P. & Keller, K. L. (2012). Marketing Management. 14th Edition. New Jersey: Prentice Hall.

Lee, M., & Choi, M. (2015). Analysis on time-lag effect of research and development investment in the pharmaceutical industry in Korea. Oseng Public Health Res Perspect, 6(4), 241-248. https://doi.org/10.1016/j.phrp.2015.07.001

Mistry, D. S. (2012). Determinants of profitability in Indian automotive industry. Tecnia Journal of Management Studies, 7(1), 20-23.

Memarista, G. (2016). Managerial optimism and debt financing: Case study on Indonesia’s manufacturing listed firms. Jurnal Keuangan dan Perbankan, 20(3), 438-447. Retrieved from: http://jurnal.unmer.ac.id/index.php/jkdp/article/view/257

Mizik, N., & Nissim, D. (2011). Accounting for marketing activities: Implications for marketing research and practice. Working Paper.

Morgan, N. A. (2012). Marketing and business performance. Journal of the Academy of Marketing Science, 40, 102-119. https://doi.org/10.1007/s11747-011-0279-9

Narayana, S. A., Pati, R. K., & Vrat, P. (2012). Research on management issues in the pharmaceutical industry: A literature review. International Journal of Pharmaceutical and Healthcare Marketing, 6(4), 351-375. https://doi.org/10.1108/17506121211283235

Nayyar, D. (2008). The internationalization of firms from India: Investment, mergers, and acquisitions. Oxford Development Studies, 36(1), 111-131. https://doi.org/10.1080/13600810701848219

Niresh, J. A., & Velnampy, T. (2014). Firm size and profitability: A study of listed manufacturing firms in Sri Lanka. International Journal of Business and Management, 9(4), 57-64.

Othman, R., & Ameer, R. (2009). Determinants and persistence of research and development investments: Evidence from Malaysia. International Journal of Emerging Markets, 4(3), 275-292. https://doi.org/10.1108/17468800910968427

Pandit, S., Wasley, C. E., & Zach, T. (2011). The effect of Research and Development (R&D) inputs and outputs on the relation between the uncertainty of future operating performance and R&D expenditures. Journal of Accounting, Auditing & Finance, 26(1), 121-144. https://doi.org/10.1177/0148558X11400583

Ross, S., Westerfield, R., & Jordan, B. (2015). Fundamentals of Corporate Finance. 11th Edition. New York: McGraw-Hill/Irwin Series in Finance, Insurance, and Real Estate.

Shah, S. Z. A., & Akbar, S. (2008). Value relevance of advertising expenditure: A review of the literature. International Journal of Management Reviews, 10(4), 301-325. http://doi.org/10.1111/j.1468-2370.2007.00228.x

Srinivasan, R., Lilien, G. L., & Sridhar, S. (2011). Should firms spend more on research and development and advertising during recessions? Journal of Marketing, 75(3), 49-65. https://doi.org/10.1509/jmkg.75.3.49

Srivastava, R., & Prakash, A. (2014). Value creation through cross-broader mergers and acquisitions by the Indian pharmaceutical firms. Journal of Strategy and Management, 7(1), 49-63. https://doi.org/10.1108/JSMA-03-2013-0017

Tellis, G., & Tellis, K. (2009). A critical review and synthesis of research on advertising in a recession. Working Paper. Department of Marketing Marshall School of Business University of Southern California.

Wang, X. H., & Yang, B. Z. (2010). The sunk-cost effect and optimal two-part pricing. Journal of Economics, 101(2), 131-148.

Wayman, R. (2015). Operating cash flow: Better than net income? Retrieved from: https://www.investopedia.com/articles/analyst/03/122203.asp




DOI: https://doi.org/10.26905/jkdp.v22i4.1871

Refbacks

  • There are currently no refbacks.


Bookmark and Share


Jurnal Keuangan dan Perbankan (Journal of Finance and Banking)

Diploma Program of Banking and Finance, Faculty of Economics and Business, University of Merdeka Malang

Published by University of Merdeka Malang

Mailing Address:
2nd floor Finance and Banking Building, Jl. Terusan Raya Dieng No. 57 Malang, East Java, Indonesia
Phone: +62 813-3180-1534
Email: jkp@unmer.ac.id

This work is licensed under a Creative
Commons Attribution-ShareAlike 4.0