Marketing spending and earnings accrual quality in accounting

Abstract

The role of marketing as a function interfacing with internal and external constituents of the organization is well established in the literature. Yet there is a dearth of research on the interface of marketing with accounting. This study attempts to examine this interface by combining marketing spending and the quality of financial accounting reporting, an important output of accounting. Marketing actions can create value and signal a firm’s financial well-being. Such value creation and signaling effects can affect financial reporting quality through improving economic fundamental factors and helping managers making high quality estimation for earnings under accrual-based accounting. Following the accounting literature, we use earnings accrual quality, the extent to which current accruals map into cash flow realizations, to measure financial reporting quality. And we attempt to explore whether marketing spending actions would be beneficial for a firm’s earnings accrual quality. Using two different data sets from COMPUSTAT and TNS databases, we find that earnings accrual quality is positively associated with the level of marketing spending but negatively associated with the volatility of marketing spending. The findings support out theorization and suggest important managerial implications of the link between marketing spending and earnings accrual quality. The study also examines whether industry dynamism can moderate this link, and the result shows that competitive intensity is an important moderator.