Financial constraints and marketing investment: evidence from text analysis

Purpose
The purpose of this study to examine the effect of financial constraint on intangible investment because intangible investment provides an overall picture of marketing investment and activity. Intangible investment also plays a significant role in facilitating future sales. Using a new measure of intangible investment (Peters and Taylor, 2017), the authors first establish that intangible investment is positively related with future sales. Then, using a new text-based measure of financial constraint, the authors show that financial constraint has a significant negative effect on future intangible investments after controlling for other factors. Intangible investment has three components. The first is R&D, the second is 30 per cent of selling and general administrative expense (SGA) and the third is other intangibles. The authors find that the negative and significant effect of financial constraint on 30 per cent SGA is stronger. This indicates that financially constrained firms reduce marketing related investments. The authors then considered firm size and found that smaller firms facing financial constraint continue to increase their intangible investments, whereas larger firms reduce their intangible investment. As a robustness test, the authors use advertising expenditure as a measure of promotion related investment and find that financial constraint has a negative effect on advertising spending. The authors then use two traditional measures of financial constraint in their analysis to compare with the new text-based measure.
Design/methodology/approach
The authors use ordinary least squares with cluster robust standard error to conduct their empirical analysis.

Findings
First the authors establish that intangible investment positively affects future sales. Further the authors find that financial constraint negatively affects intangible investment. Moreover, financial constraint negatively affects the brand capital of intangible investment.

Research limitations/implications
The authors did not conduct any industry specific analysis to see how financial constraints affect intangible investment across different industries. Industry specific analysis is important because in some industries/sectors intangibles are clearly more important than in others, so this is an important avenue for future research. It will also be interesting to explore if and how financial constraint has a mediating effect on sales growth via intangible investment and different components of intangibles.

Practical implications
This study identifies another important factor that can negatively affect brand capital investment.

Originality/value
The authors have used a measure of financial constraint and text mined all the annual reports of US firms for the period of 1994-2016 to compute this measure.