Advertising and Ownership Structures: Evidence from the Emerging Chinese Market

Abstract

With fast economic growth and urbanization of the country, the size of the domestic consumer market of China is getting larger. To attract and satisfy the emerging new customers in China, local and multinational firms face the challenge of innovating their products and communicating their value with the customers. Hence, R&D and marketing functions in the Chinese firms have become more important for their sustainable growth. In this paper, we focus on advertising expenditures spent by publicly listed Chinese firms and examine key determinants of advertising spending by the Chinese firms. By manually reading annual reports from the public firms each year between 2004 and 2008, we obtained the data for firm-level advertising expenditures. We then propose the firm’s ownership structure as an important driver of advertising spending in China. Specifically, we measure the ownership by 1) government, 2) institutions, and 3) management using financial statement data, and we find that institutional ownership is positively associated with adverting expenditures. With the findings, we provide several implications to managers, especially managers conducting their business in an emerging Asian market like China.