The Impact of Advertising and R&D on Bankruptcy Survival: A Double-Edged Sword

Forthcoming, Journal of Marketing

Posted: 21 Dec 2020

See all articles by Niket Jindal

Niket Jindal

Indiana University - Kelley School of Business - Department of Marketing

Date Written: 2020

Abstract

Advertising and research and development (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.

Keywords: advertising, bankruptcy, credit, R&D, suppliers, survival

JEL Classification: M30, M31, M37, M39, G33

Suggested Citation

Jindal, Niket, The Impact of Advertising and R&D on Bankruptcy Survival: A Double-Edged Sword (2020). Forthcoming, Journal of Marketing, Available at SSRN: https://ssrn.com/abstract=3651018

Niket Jindal (Contact Author)

Indiana University - Kelley School of Business - Department of Marketing ( email )

Kelley School of Business
Bloomington, IN 47405
United States

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