Marketing communication expenditures and financial capital—the impact of marketing as an option

This paper examines the financial effectiveness of marketing communication expenditure (MCE) as an instrument to increase risk-weighted capital. We nest a cross-sectional time-series panel model within the risk-adjusted earnings principles of Ohlson (1995), and apply the model to a dataset of NSW credit unions during a period of regulatory intervention that abruptly required management to meet minimum capital thresholds. Because they cannot issue equity, and other income increasing options conflicted with credit union philosophy, this provided a strong incentive to use MCE as an option to rapidly increase revenue (and capital). We find MCE was financially ineffective in small credit unions, had a positive marketing leverage impact in large credit unions, and required regular renewal. Our study makes several contributions by: (i) disaggregating and testing the financial impact of marketing; (ii) applying a risk-adjusted model generally applicable to non-listed firms; (iii) informing on the capitalisation/expensing debate; (iv) highlighting when and why MCE as a real option is financially (in)effective; and, (v) adding to the growing interface in the financial/marketing literature.