1 Introduction
Global advertising expenditure reached 763 billion US dollars in 2021 and is expected to rise to 1050 billion in 2025 (Statista
2021). Given the large amount of money spent on advertising, marketers and scholars alike have continuously raised the question of advertising spending results (Luo and Donthu
2005). However, many advertisers are not aware of the efficiency of their marketing efforts (Lewis and Rao
2015). Advertising efficiency defines the relationship between advertising impact and its underlying investment, relative to a firm’s competitors (Büschken
2007). High levels of advertising efficiency are desirable from a company perspective since they are an important predictor of profitability (Färe et al.
2004; Luo and Donthu
2001; Rahman et al.
2020). Since the work of Luo and Donthu (
2001) on the application of data envelopment analysis (DEA) for assessing advertising efficiency, numerous articles have applied this technique to investigate advertising efficiency in various markets (Büschken
2007; Luo and Donthu
2005; Pergelova et al.
2010; Sellers-Rubio and Calderón-Martínez
2021). For instance, research conducted in the German car market reveals that only 20% of the brands investigated are efficient with respect to their advertising expenditure (Büschken
2007). Likewise, a study investigating the advertising efficiency of six US breweries reveals that only one company was efficient in terms of advertising and choice of media (Färe et al.
2004).
Some studies go one step further and investigate how advertising efficiency can be increased by contextual factors which are not directly included in its assessment (i.e., given by the set of input and output variables; Luo and Donthu
2001; Pergelova et al.
2010) and which can help to raise advertising efficiency. For instance, Deighton et al. (
1994) suggest targeting new, instead of existing, consumers to increase advertising efficiency. Smith and Park (
1992) reveal that brand extensions have the potential to increase advertising efficiency and Cheong et al. (
2014) note that several internal and external factors have an impact on advertising efficiency. Both the demographic and psychographic structure of consumers represent external factors that need to be considered as relevant forces driving advertising efficiency. In this context, one major trend in consumer psychographics is the awareness and demand for corporate sustainability. Recent findings yielded by a survey with 1,028 US citizens highlight the relevance of sustainability in the US and reveal that US consumers may boycott or even avoid brands following poor sustainability practices (Kirienko and Schreiber
2021). Another study, conducted by the IBM Institute for Business Value with 16,439 global consumers, reports that half of the respondents (51%) indicate that environmental sustainability is more relevant for them today as compared to 12 months before (Cheung et al.
2022).
Accordingly, climate change and the related trends of green consumerism and environmentalism have forced organizations’ business strategies to meet consumers’ and investors’ demands for firms with high corporate sustainability performance (McWilliams and Siegel
2001). Ignoring the relevance of environmentally and socially conscious operations might have severe consequences for organizations, such as a negative reputation (Eccles and Serafeim
2013), brand dilution, or financial penalties (Hirunyawipada and Xiong
2018). An increase in negative reputation or brand dilution caused by the lack of corporate sustainability performance might result in a decrease in sales. Several practical examples—such as BP’s Deepwater Horizon oil rig catastrophe in the Gulf of Mexico or Foxconn’s (Apple’s manufacturer in China) exploitation of its workforce—demonstrate that ignoring sustainable aspects can harm a company’s profit considerably (Eccles and Serafeim
2013). Corporate sustainability refers to a company’s engagement in environmental, social, and governance activities, also called ESG (Chabowski et al.
2011).
1 Environmental activities include corporate practices such as efficient resource use or a reduction in emissions (Boffo et al.
2020). Social activities include a firm’s effort in promoting human rights and taking responsibility for their employees and products. Finally, activities in the governance domain cover organizational factors, like the board structure, codes of conduct, or a firm’s tax strategy (Tang
2019).
Given the ongoing climate crisis and the associated severe consequences for humanity and life on earth (United Nations Environment
2013), investors and consumers alike are beginning to evaluate companies based on their corporate sustainability performance. Companies engage in sustainable behavior to improve their corporate image, as a competitive strategy, and to improve society and the lives of stakeholders (Hu et al.
2018). On the one hand, some evidence suggests that this strategy is promising from the perspective of maximizing profit: Ameer and Othman (
2012) showed that, in some industry sectors, companies engaging in sustainable practices have higher mean sales growth, return on assets, income before taxes and cash flows from operations as compared to firms which do not implement sustainable corporate practices.
On the other hand, recent literature report increasing levels of consumer green skepticism (Farooq and Wicaksono
2021). Consumers become skeptical about the validity of environmental claims. This particularly holds for large companies (Carlos and Lewis
2018), which might have been associated with greenwashing and environmental scandals. Large companies are considered to be more self-serving (Farooq and Wicaksono
2021). Indeed, a recent study reports that consumers associate large fashion brands with negative sustainability practices (Reck et al.
2022). Decreasing levels of trust might attenuate any positive effect of corporate social performance on advertising efficiency. In this context, existing research reveals brand trust as an important predictor of purchase intention, while demonstrating that unethical corporate behavior decreases trust (Herbst et al.
2013). Likewise, inconsistencies in corporate sustainability perceptions decrease trust in the company and negatively impact purchase intentions (Lin et al.
2015). Low levels of trust negatively impact advertising effectiveness (Schouten et al.
2020) by hindering consumers to find any arguments for purchasing this particular brand (Herbst et al.
2013).
To expand the literature exploring opportunities for increasing advertising efficiency, this paper investigates the relationship between a firm’s corporate sustainability performance—in terms of its environmental, social, and governance activities—and advertising efficiency. More formally, the following research question will be addressed:
RQ: To what extent does corporate sustainability performance (i.e., environmental, social, and governance activities) influence advertising efficiency across different industry sectors and over time?
A better understanding of the impact of a firm’s corporate sustainability performance on advertising efficiency will contribute to the literature and practice of management in several ways. First, knowledge of the differential effects of the three different ESG dimensions (environmental, social, and governance) of corporate sustainability performance will offer deeper insights into the relevance of each dimension in increasing advertising efficiency. Second, the findings of this study will support marketers and advertisers in making strategic spending decisions. More specifically, identifying corporate sustainability activities which leverage the effect of advertising will support managers in developing an overall communication strategy that expands traditional advertising by communicating the relevant sustainability activities the company is engaged in. This would assist the company in building a favorable reputation for corporate sustainability. The problem of potential greenwashing in this regard is accounted for in this study by relying on independent, unbiased, and objective sustainability rating providers, instead of using self-reported measures by the companies. Third, our study offers insights into how advertising efficiency and corporate sustainability performance have changed over time and hence follows the call to investigate advertising efficiency from a long-term perspective (Cheong et al.
2014). In addition, the analysis of aggregated data in a time series allows for observation of general conclusions over time which are not specific to only one company.
Sections
2 to
6 of this paper are structured as follows. Section
2 provides conceptual underpinnings on the postulated relationship between corporate sustainability performance and advertising efficiency also driven by other contextual factors. Section
3 presents methodological details required for the empirical investigation: multi-directional efficiency analysis to determine companies executing efficient advertising (vis-á-vis their competitors), panel regression to estimate the impact of corporate sustainability performance on companies’ success and a three-level hierarchical model to investigate the dynamic of this relationship over time for each industry sector. Section
4 details on the two data sets employed, Sect.
5 reports the results obtained, and Sect.
6 discusses the findings and concludes.
4 Data
For this study, we rely on two data sets of public equity firms from the US from two different data providers, thereby eliminating the threat of common method bias in our study. Furthermore, the majority of the firms used in our sample operates outside the US as well. For instance, the dataset included firms such as Amazon Inc., Netflix Inc., Microsoft Corp., Walmart Inc, Mattel Inc., Coca Cola CO, Starbucks Corp., and General Motors Co to name just a few examples for firms that serve customers worldwide. This high globalization level across industries allows a holistic global perspective and contributes to the generalizability of our results.
We obtain firm-level data from the firms’ annual financial statements from Compustat including revenue, advertising expenditure, closing prices, common shares outstanding, total assets and shareholders’ equity.
6 Furthermore, we use firm-level ESG data from Sustainalytics including the overall ESG scores as well as the environmental, social and governance subscores.
ESG scores relate to a firm’s performance regarding the three ESG dimensions (environment, social, governance) and are assessed by ESG rating services (e.g., Kinder Lydenberg Domini (KLD) Research & Analytics, Refinitv, Bloomberg ESG, and Morningstar Sustainalytics). These standardized criteria to measure firms’ environmental, social and corporate governance activities serve as a proxy for corporate sustainability performance (Hu et al.
2018). Depending on the provider, ESG scores are based on a large number of dimension-specific key performance indicators, which are reported at the aggregated dimensions and overall level. Firms are scored between 0 and 100.
The environmental dimension deals with issues related to climate change, such as environmental policy and management, protection of biodiversity, and water use and management (Muñoz-Torres et al.
2019). Examples of indicators for the environmental subscore are carbon, waste, and water intensity. The social dimension represents human welfare, diversity, human rights, and equality among others (Markopoulos et al.
2020). Indicators such as employee training, number of fatalities, and health and safety certifications determine the social subscore. Finally, the governance dimension assesses an organization’s direction and performance, strategy formulation, policy-making, accountability of the board, management structure, and employee compensation (Markopoulos et al.
2020). Examples of indicators assessing the governance dimension are tax transparency, disclosure of directors’ remuneration, and board independence.
Since the ESG data is reported quarterly, we compute annual average ESG scores and subscores for each firm and year to match the annual frequency of the data from the financial statements. In total, the final data set only includes firms with full data availability in both data sets and is composed of 1,950 observations from 195 firms in five industry sectors and spans an observation period of 10 years from 2010 to 2019.
7 We investigate a potential shift in customer’s awareness and demand for corporate sustainability performance by generating two subsamples with each subsample including an observation period of five years: subsample 1 includes annual observations from 2010 to 2014 and subsample 2 consists of observations from 2015 to 2019. Hence, the latter data set considers recent events driving environmental awareness, such as the Fridays-for-future movement which started in September 2018 (Fridays for Future
2022). A longitudinal study conducted by the Center For Climate Change Communication with US citizen reported that the same percentage (64%) of respondents experience climate change as personally important in 2019 and 2022 (Leiserowitz et al.
2019,
2022). Accordingly, disregarding the last three years (i.e., 2020–2022) does not seem to be a major limitation of our study.
The relevant descriptive statistics for the dataset are reported in Table
3, which includes the overall ESG score as well as the three ESG subscores serving as the independent variables for the panel regression
8 and, on the other hand, Tobin’s
Q and advertising intensity as key performance indicators. An analysis of the descriptive statistics provides essential information on the homogeneity or heterogeneity of the firms, which informs the subsequent analysis conducted in this study.
The firms have been grouped by industry sector according to their SIC code (Standard Industry Classification). The manufacturing sector reports the highest average overall ESG score with a value of 61.28, as well as the highest social and environmental subscores. At the same time, the manufacturing sector invests a considerable amount of its revenue in advertising, with the highest average advertising intensity of 3.66% across all industry sectors. Tobin’s Q is also high on average with a value of 2.53, representing the second highest Tobin’s Q among all industry sectors.
The transportation sector reports the second highest average ESG score (56.42), but the lowest Tobins’Q (1.50), with a moderate level of advertising intensity (3.10%). Retail trade as well as services have a similar average ESG score of 55.33 and 55.70, respectively. However, Tobins’ Q and advertising intensity are higher in the services sector with values of 3.09 and 3.18%, respectively, compared to the retail trade sector with a Tobin’s Q of 2.49 and an advertising intensity of 2.12%. The finance, insurance and real estate sector exhibits the lowest average ESG score and environmental subscores, as well as a low advertising intensity of 2.24% and relatively low Tobin’s Q of 1.55.
Average ESG scores vary from 53.40 (finance, insurance and real estate) to 61.28 (manufacturing) across the five different industry sectors, and standard deviations range from 6.85 (finance, insurance and real estate) to 8.96 (manufacturing). At the same time, we observe an increase in ESG scores (with intermediate peaks for some industry sectors) from 2010 to 2019 of about four (for manufacturing, services) to about eight percentage points (for transportation, retail trade, finance). Similarly, Amon et al. (
2021) document increasing ESG scores over time which is likely due to an increase in general investor and consumer awareness of corporate sustainability over time. Overall, the descriptive analysis of the data set indicates that, on average the firms are rather homogeneous in terms of standard deviation of ESG scores, Tobin’s
Q and advertising intensity across the industry sectors.
Table
2 shows the average correlation coefficients over time between the environmental, social and governance subscores across all firms for the full observation period. All ESG dimensions report on average a positive correlation with each other with a weak correlation being observed between governance and the other two ESG dimensions, while the environmental and social subscores are moderately correlated with each other.
Table 2
Correlation matrix of ESG subscores
ENV | 1 | | |
SOC | 0.41 | 1 | |
GOV | 0.09 | 0.14 | 1 |
Table 3
Descriptive statistics of data analyzed
Manufacturing | 80 | Mean | | 60.68 | 58.47 | 67.04 | 2.53 | 3.66 |
SD | 8.96 | 13.47 | 10.56 | 7.05 | 1.45 | 4.39 |
Min | 42.01 | 35.36 | 37.44 | 48.76 | 0.98 | 0.06 |
Max | 84.70 | 90.88 | 87.63 | 84.84 | 8.92 | 25.72 |
Transportation, communication, electric, gas and sanitary service | 14 | Mean | 56.42 | 56.32 | 50.55 | 67.09 | 1.50 | 3.10 |
SD | 8.44 | 13.04 | 8.87 | 7.75 | 0.60 | 2.49 |
Min | 41.61 | 38.29 | 37.04 | 49.86 | 0.85 | 0.32 |
Max | 68.99 | 79.62 | 64.95 | 77.77 | 3.18 | 8.30 |
Retail trade | 38 | Mean | 55.33 | 50.78 | 52.95 | 65.65 | 2.49 | 2.12 |
SD | 7.29 | 11.34 | 8.39 | 6.43 | 1.35 | 1.83 |
Min | 43.90 | 35.27 | 39.5 | 48.66 | 1.06 | 0.16 |
Max | 70.75 | 77.51 | 71.55 | 76.19 | 6.47 | 7.86 |
Finance, insurance and real estate | 35 | Mean | 53.40 | 47.39 | 56.73 | 56.60 | 1.55 | 2.24 |
SD | 6.85 | 12.65 | 7.23 | 8.98 | 1.17 | 2.44 |
Min | 44.10 | 31.50 | 41.67 | 42.73 | 0.96 | 0.3 |
Max | 73.10 | 75.38 | 73.26 | 78.04 | 5.99 | 12.36 |
Services | 28 | Mean | 55.70 | 54.22 | 52.90 | 62.92 | 3.09 | 3.18 |
SD | 9.63 | 15.30 | 10.62 | 6.31 | 1.57 | 3.27 |
Min | 42.56 | 35.93 | 37.71 | 50.86 | 1.21 | 0.10 |
Max | 76.87 | 85.84 | 79.39 | 75.44 | 7.70 | 11.54 |
6 Conclusion
In general, advertising has the overall objective of increasing sales and a company’s profits and ultimately its firm value. However, several scholars have questioned the efficiency of advertising spending. The current research aims at identifying new opportunities to increase advertising efficiency without directly changing the input or output variables, but indirectly by managing a firm’s corporate reputation for sustainability. In doing so, we first analyzed the advertising efficiency of 195 US public equity firms in five industry sectors over a period of 10 years using multi-directional efficiency analysis. Our data set allows us to draw more general conclusions beyond the scope of this geographical region relevant for other economies similar to the US as well, because many of the companies in the data set are multinationals.
The efficiency of a firm is measured by considering the relevant input and output variables, while no relative importance is defined for these input- and output-specific improvements (Asmild and Matthews
2012). Furthermore, the reliance on two different data sets (i.e., firms’ financial statements from Compustat and ESG scores from Sustainalytics) avoids the risk of common method bias in our data set.
Our analysis reveals that most of the firms in our dataset are inefficient. Relative to their competitors, 68% of the firms analyzed have the potential to improve their advertising efficiency across all the industry sectors. Our analysis further indicates that—although advertising efficiency remains relatively stable for 69% of firms—a larger proportion of companies became more inefficient (18%) than efficient over time (13%). This result confirms previous research in this field (Cheong et al.
2014) and justifies calls for new opportunities to increase advertising efficiency.
At the same time, we observed that—compared to less efficient firms—fully efficient firms have higher corporate sustainability performance. This observation provides the first indication that corporate sustainability performance might be linked to advertising efficiency. To further test this assumption, we estimated a fixed effects panel regression model. The results reveal a positive and significant effect of corporate environmental performance on advertising efficiency. To observe any changes in the relevance of the three ESG dimensions over time, we further divided the sample into two subsamples, each consisting of a period of five years. The influence of the environmental dimension on advertising efficiency was highly significant in both periods. Hence, our findings support our main claim that a strong environmental reputation can leverage advertising efficiency. While the effects of the social and governance dimensions were negative and significant between 2010 and 2014, these effects decreased and the effect of the social dimension became insignificant for the period between 2015 and 2019. It seems that social practices are considered as a hygiene factor, or in other words, “doing good” in the social dimension is a requirement to avoid any negative effect on advertising efficiency. An investment made in governance practices does not seem to lead to increases in advertising efficiency. One possible explanation for this result can be found in the nature of governance activities: They mainly relate to a firm’s internal processes, such as tax transparency, disclosure of directors’ remuneration, and board independence, which are not as useful as environmental practices (i.e., reductions in carbon emission or waste) for marketing communication purposes.
The analysis of the dynamics over time for each industry sector and ESG dimension individually using a three-level hierarchical regression model offers further evidence of the significant effect of corporate sustainability performance on advertising efficiency. The results indicate a significant downward trend in the relationship between advertising efficiency and the environmental dimension for the manufacturing sector. This finding corroborates our theoretical reasoning postulating that consumers have higher expectations related to energy-intense industries and meeting these expectations is considered a minimum requirement to compensate for the intense use of natural resources.
Previous studies’ findings show a positive relationship between a firm’s reputation, corporate sustainability performance, and the value of a firm (e.g., Saeidi et al.
2015). In contrast to previous research, we explicitly focus on a firm’s reputation for sustainability, which we identified as highly relevant for advertising efficiency. We advance existing findings by illuminating the direct link between corporate sustainability performance and advertising efficiency and we investigate the separate impact of a firm’s environmental, social and governance activities. Overall, our findings suggest that firms’ environmental practices increase advertising efficiency.
Further extensions of this research could be a more refined separation of various advertising expenses for the measurement of the advertising efficiency. Additionally, the consideration of the individual key performance indicators in each ESG dimension would be interesting to further investigate in detail which corporate sustainability activities impact a firm’s advertising efficiency.
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