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