Chapter 11: Putting the Cart Before the Horse: Short-term Performance Concerns as Drivers of Marketing-Related Investments
Anindita Chakravarty and Rajdeep Grewal The year 2002 was recognized as a time of far-reaching corporate reform, with the enactment of the Sarbanes-Oxley Act on 30 July (Pub. L. 107-204, 116 Stat. 745). The act was designed to protect investors by tightening accounting standards and reducing management flexibility with regard to reporting of financial metrics. Cohen et al. (2011) suggest that since 2002, accounting report credibility has increased, and the practice of exploiting accounting methods (or accrual-based earnings management) to misrepresent actual performance has declined. However, post–Sarbanes-Oxley, such accounting-based earnings management practices have been substituted for a gradual rise in a tactic called real activities management (REAM) that is of direct concern to marketing professionals and academics (Schipper, 2003; Cohen et al., 2011). In the context of marketing, REAM refers to the practice by which managers deviate from their planned marketing-related expenditures to deliver current period earnings that maintain or increase stock prices. Roychowdhury (2006) and Gunny (2010) list multiple forms of REAM, two of which are directly relevant to marketing. First, REAM practices might accelerate the timing of sales by instituting increased sales promotions and lenient credit terms to downstream channel partners. Lodish and Mela (2007) and Mela et al. (1998) have warned repeatedly that accelerating sales through such price discounts dilutes brand equity and customer loyalty over time. Moreover, the Securities and Exchange Commission (SEC) has investigated several firms, including Coca-Cola, that report high earnings due not to increased sales but rather to accelerated sales to downstream...
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