Analyst Earning Forecasts and Advertising and R&D Budgets: Role of Agency Theoretic Monitoring and Bonding Costs

Anindita Chakravarty and Rajdeep Grewal
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Key Takeaways

​Pressure to meet quarter-end analyst earnings forecasts can lead to advertising and R&D budget reduction.

Investors bear monitoring costs and managers bear bonding costs that moderate the extent of budget manipulation in response to analyst earning forecasts.

Unanticipated advertising and R&D budget reductions can lower stock returns and increase stock returns risk.

We study unanticipated advertising and R&D budget decreases in response to analyst earning forecasts. We find that investor- as well as manager-specific agency costs moderate the extent of such decreases and that advertising and R&D budget manipulations can adversely affect stock returns and risk.


Considered discretionary for reporting purposes, managers often ignore long-term cash flow repercussions of cutting advertising and R&D budgets for reasons unrelated to product markets, such as earnings pressures. However, there is no theoretical and empirical investigation of the contingent relationship between analyst forecasts (a source of earnings pressure) and marketing-related constructs in the extant literature. Monitoring- and bonding-related agency costs indicate specific situations such that investor attention is focused, thereby saving costs of constant vigilance.


We studied a sample of high-technology firms and collected secondary data from COMPUSTAT, CRSP, I/B/E/S,Kantar, 10-Q and 10-K reports and Capital IQ.


Artificially imposed incentives on managers (monitoring costs) as well as personal career management concerns (bonding costs) moderate the extent to which managers react to analyst forecasts. Specifically, (1) bonus versus equity proportion of CEO compensation enhances the likelihood, (2) output experience of CEOs decreases the likelihood, (3) throughput experience of CEOs increases the likelihood, and (4) increasing levels of marketing and R&D intensity decreases the likelihood of managers reacting to analyst forecasts with unanticipated decreases in advertising and R&D budgets.

Bonus versus equity in CEO compensation enhances, output experience of CEOs decreases, throughput experience of CEOs increases, and marketing intensity decreases the likelihood of managers reacting to analyst forecasts with marketing budget cuts. Such cuts have long-term financial implications.


Every investor, whether existing or potential, would like to know that the company they invest in is governed in a way that maximizes the potential for long-term returns. This research sheds light on CEO and firm-level characteristics that might help govern the extent of manipulations of growth activities related to marketing in response to analyst earnings forecasts. Investors of all public companies (at least in the U.S.) can benefit from this research.

Questions for the Classroom

  • What is the role of marketing in the context of earnings management?
  • How can agency theory be used to understand governance problems in the marketing literature?
  • What kind of personal costs can managers bear by enagaging in real activity manipulation?

Full Article
Anindita Chakravarty and Rajdeep Grewal (2016), "Analyst Earning Forecasts and Advertising and R&D Budgets: Role of Agency Theoretic Monitoring and Bonding Costs." Journal of Marketing Research, 53 (4), pp. 580-596.

Anindita Chakravarty is Assistant Professor of Marketing, Terry College of Business, University of Georgia (e-mail:

Rajdeep Grewal is the Townsend Family Distinguished Professor of Marketing, Kenan-Flagler Business School, University of North Carolina, Chapel Hill (e-mail:

Author Bio:

Anindita Chakravarty and Rajdeep Grewal
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