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When a firm is in bankruptcy, the cumulative effects of its past advertising and R&D can be a double-edged sword. Advertising and R&D increase bankruptcy survival when the firm’s suppliers have a high level of influence, relative to other creditors, on the bankruptcy court’s decision. In contrast, when suppliers have a low level of influence, advertising and R&D decrease bankruptcy survival.
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Jindal, Niket (2020), “The Impact of Advertising and R&D on Bankruptcy Survival: A Double-Edged Sword,” Journal of Marketing.
Advertising and R&D benefit firms by increasing sales and shareholder value. However, when a firm is in bankruptcy, the cumulative effects of its past advertising and R&D can be a double- edged sword. On the one hand, they increase the firm’s expected future cash flow, which increases the likelihood that the bankruptcy court will decide the firm can survive. On the other hand, they increase the liquidation value of the firm’s assets, which decreases the likelihood that the bankruptcy court will decide that the firm can survive. The author argues that the ability of advertising and R&D to either increase or decrease bankruptcy survival is contingent on the influence that the firm’s suppliers have, relative to other creditors, on the bankruptcy court’s decision. Advertising and R&D increase (decrease) bankruptcy survival when suppliers have a high (low) level of influence. Empirical analyses, conducted on 1,504 bankruptcies, show that advertising (R&D) increases bankruptcy survival when at least 35%–38% (18%–21%) of the bankrupt firm’s debt has been borrowed from suppliers, whereas it decreases bankruptcy survival below this point. Out-of-sample machine learning validation shows that the ability to predict whether a bankrupt customer will survive is substantially improved by considering the firm’s advertising and R&D.
Special thanks to Holly Howe and Demi Oba, Ph.D. candidates at Duke University, and Adam Mills, Assistant Professor at Loyola University, for their support in working with authors on submissions to this program.
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