Digital versus Traditional Advertising and the Recognition of Brand Intangible Assets

Abstract

This paper examines how different advertising media affect the occurrence and nature of brand asset recognition arising in the context of acquisitions. Prior research documents that advertising is positively associated with firm sales and brand value. However, this research focuses on aggregate advertising expenditures, which ignores major recent shifts in advertising expenditures from traditional channels (such as TV and newspaper) to digital advertising (primarily paid search and online display). Using proprietary data, I exploit this trend and decompose advertising expenditures into three core component elements—traditional, online display, and paid search—to examine how key advertising media affect subsequent brand asset recognition during mergers and acquisitions. Consistent with expectations, I find that subsequent to acquisition, target firms' traditional and online display advertising exhibit a higher likelihood of brand asset recognition, higher recognized brand asset values, and longer amortization schedules, as compared to paid search advertising. I also document higher deal premiums for targets, which spend more on traditional advertising. Affirming the acquirer's recognition of a brand asset, additional results reveal that investors react positively to the initially recognized brand amount, and that those brand intangible assets are positively associated with acquirer future revenue. Overall, these results confirm expected heterogeneous effects of different advertising channels on the recognition and characteristics of the underlying brand asset.