Should all service firms follow the recessionary advertising prescription?

Abstract

Purpose

The purpose of this study is to investigate whether different types of service firms, experience-based or credence-based, benefit equally from the prescription to increase advertising during recessions.

Design/methodology/approach

The research consists of three steps: using the Hodrick–Prescott (HP) filter to extract the cyclical component of the time series, estimating the level of cyclical comovement and estimating the relationship between comovement and stock price.

Findings

The results suggest that experience-based service firms benefit financially from adopting the advertising “prescription” that encourages firms to increase advertising during recessions. Credence-based firms, however, experience negative financial returns when they implement the advertising “prescription”.

Research limitations/implications

The limitations are data from US firms and a smaller sample size. The use of the HP filter may be considered a limitation, as other filtering methods may be utilized. The results suggest that academics’ and practitioners’ advertising “prescription” is not a one-size-fits-all strategy for service firms.

Practical implications

Managers must be aware that the type of service their firm provides influences whether increasing or decreasing advertising spending during a recession has a positive or negative impact on financial performance. Credence-based firms, such as those in the banking and insurance industries should avoid increasing advertising spending during recessions, as it may lead to negative financial performance. Experience-based firms, such as those in the entertainment and travel industries, benefit financially from increased advertising during recessions.

Originality/value

This research is first to investigate the differential impact of recessionary advertising on service firms.

Citation

L. Keel, A. and Bourdeau, B. (2014), "Should all service firms follow the recessionary advertising prescription?", Journal of Services Marketing, Vol. 28 No. 3, pp. 207-213. https://doi.org/10.1108/JSM-01-2013-0006