Revisiting the carry-over effects of advertising in franchise industries

Despite prior studies, little has been done to understand the advertising carry-over effect. The purpose of this study is to investigate the heterogeneous attributes of the carry-over effect by focusing on the differences between franchise and non-franchise firms.

The data were retrieved from the Compustat database and annual corporate financial reports (10-K) for five representative franchise industries from 1980 to 2009. Ultimately, 185 firms were included and 1,592 firm-year observations were analysed. This study used a Panel VAR (Vector Autoregression) to examine the effects of advertising on firm performance. We can control endogenous effects using Panel VAR, which also allows us to control unobserved firm-specific heterogeneity.

This study found that advertising had no effect on sales growth or brand equity in the long run for non-franchise firms and further confirmed that non-franchise firms incur agency costs. In contrast, the effect of advertising on sales growth and brand equity was significant for franchise firms. A carry-over effect of advertising on brand equity was detected for franchise firms, but sales growth rapidly decreased after two years.

Even though franchise firms retain the carry-over effect of advertising on brand equity, franchisors should carefully monitor market trends and their sales growth because sales growth rapidly decreased after two years.

This study incorporated the concepts of the delayed response effect and the customer holdover effect to better understand the advertising carry-over effect. From the results, this study proposed a more detailed concept of carry-over effects for further studies. From this perspective, this study makes both academic and industrial contributions.