Advertising Agency Terminations and Reviews: Stock Returns and Firm Performance

Abstract A key element in generating firm cash flows is the marketing strategy developed by a firm's advertising agency. This study examines both the stock market reaction and selected firm performance measures associated with Wall Street Journal announcements of advertising agency terminations and accounts placed in review (potential terminations). Besides finding a negative investor response to each event type, we report a significant decline in stock market values before such announcements. An examination of time series accounting data reveals a deterioration in firm sales growth before and after the announcement. Declines also occur in both liquidity and operating income. Our evidence is mixed regarding whether industry trends are responsible for these changes in financial position. We do not find an improvement in firm performance following the agency termination or potential termination. Strategic implications and directions for future research are discussed.