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The Impact of Advertising and R&D on Bankruptcy Survival

The Impact of Advertising and R&D on Bankruptcy Survival

Niket Jindal

J.C. Penney, Hertz, Neiman Marcus, J. Crew, Pier 1, Gold’s Gym. These are just some of the well-known companies that have filed for bankruptcy in the first half of 2020. There are also large multi-billion-dollar companies that have filed for bankruptcy this year with names that may be less well-known to consumers, such as Exide, but have technology and products that are well-known to their business customers.

With the recent rise in corporate bankruptcies, suppliers and partners are being forced to make a difficult decision. Should they bet on their bankrupt customer or partner to survive by continuing to invest, or perhaps even increasing their investment, in their relationship? Or, should they bet that the bankrupt customer or partner will not survive and reduce or eliminate their investments in the relationship and redeploy critical resources to other customers or partners? A new Journal of Marketing study explores this conundrum to give managers insights they can use to navigate these difficult decisions.

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A losing bet can be catastrophic for a supplier or partner. On one hand, if the company bets on a bankrupt customer or partner to survive and it does not, investments in the relationship will be lost and the company will have fewer resources and time to try to attract other customers and partners to make up for lost sales. On the other hand, if the company bets against the bankrupt customer or partner and it does survive, the relationship will be soured and future sales are put at risk.

Given the high stakes, managers look for signals to inform their decision about whether to bet on a bankrupt customer or partner. Managers have traditionally used financial indicators (for example, the bankrupt company’s leverage, liquidity, and size) as signals to inform their decision. Because intangible assets comprise a large portion of many companies’ value, I recently studied whether a company’s past investments in intangible assets—specifically investments in advertising and R&D—can aid suppliers and partners in their decision. By analyzing 1,672 bankruptcy cases filed in U.S. bankruptcy courts from 1996 to 2019, I discovered that managers can substantially improve their odds of correctly predicting whether a bankrupt customer or partner will survive by considering the company’s past advertising and R&D investments in addition to the usual financial predictors. Specifically, the accuracy in predicting whether a bankrupt company will survive improved 11%, on average, by considering the company’s advertising and R&D.

How should suppliers and partners incorporate a bankrupt company’s advertising and R&D investments into their decision-making process? Carefully. When a company is in bankruptcy, its past advertising and R&D investments are a double-edged sword because they increase the odds of surviving for some bankrupt companies and decrease the odds for others. The key is to look at the portion of the bankrupt company’s debt that is due to suppliers versus banks because this shows the influence that the bankrupt company’s suppliers will have, relative to other creditors, in the bankruptcy process. Suppliers have greater noncontractual revenue and generally do not require collateral whereas banks have less noncontractual revenue and generally do require collateral. Thus, the impact of advertising and R&D on the value that is received if the bankrupt firm survives versus gets liquidated differs for suppliers versus banks.

When suppliers have a large level of influence, advertising and R&D increase the odds the bankrupt company will survive. However, when suppliers have a low level of influence, advertising and R&D decrease the odds the company will survive. Specifically, I find that a bankrupt company’s advertising increases the odds the company will survive when at least 38% of the company’s debt has been borrowed from suppliers. For R&D, I find that the cutoff point is when at least 21% of the company’s debt has been borrowed from suppliers. 

Read the full article.

From: Niket Jindal, “The Impact of Advertising and R&D on Bankruptcy Survival: A Double-Edged Sword,” Journal of Marketing.

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Niket Jindal is Assistant Professor of Marketing, Kelley School of Business, Indiana University.