Firms Time Marketing Spend to Boost Year-end Earnings
Economists have previously noted firms’ propensity to “smooth out” their earnings numbers with marketing campaigns and other promotional tools that help their year-end numbers, perhaps at the cost of their long-term performance. A new paper*published by Harvard Business School explores this possibility with a case study in the soup industry.
The study finds that “the timing of marketing actions (price, feature and display promotions) observed at the retail level are closely related to the fiscal calendar of product manufacturers.
In contrast to prior literature that suggests firms reduce discretionary expenditures in order to boost reported earnings, we show that soup manufacturers roughly double the frequency of all marketing promotions at the fiscal year-end.
The statistic at the heart of their findings: Soup firms use price reductions to boost sales by an average of 20% at the fiscal year-end. However, the resulting loss in the next quarter from such activity totals to an average of 23.5%. Thus, there is a net loss of roughly 3.5%.
Furthermore, the study suggests that “firms systematically alter their pricing and promotion strategies both within and across brands when incentive to manage earnings upwards are stronger.”
The authors continue, “More interestingly, across brands we find that firms shift display promotions away from smaller revenue brands and towards larger ones following periods of poor financial performance. This is consistent with the actions being directed by parties higher in the organization than the brand managers, as no individual brand manager would voluntarily give up aisle displays in support for his or her brand.”
The authors say the study should “be of interest to practitioners negotiating with suppliers as well as those responsible for setting price and promotion strategy in response to competitor actions; we show that a firm’s internal desire to meet or beat earnings benchmarks can help determine when it will take marketing actions. The final results relating to the level of those responsible for the actions may also be of interest to those designing incentive-based compensation as well as regulators monitoring reporting of fiscal period-ending promotion.”
*An Investigation of Earnings Management through Marketing Actions (Craig J. Chapman and Thomas J. Steenburgh, Harvard Business School)
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