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Executive confidence and myopic marketing management

  • Original Empirical Research
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Abstract

Prior literature does not provide a clear prediction of how executive confidence affects the degree to which a firm engages in “myopic marketing management,” the tendency to decrease current marketing spending to mitigate any potential earnings shortfall. We propose that highly confident CEOs are more likely to cut marketing spending to raise current earnings numbers because they believe in their ability to generate high future firm earnings that can cover the long-term losses arising from their current short-term actions. The effect is heightened when the board of directors is more independent and monitors more, but attenuated if CMOs are more confident and thus are better able to convince their CEOs and boards of directors to support continued investments in marketing. The moderating impact of CMO confidence is proposed to be stronger as the CMO becomes more powerful. Using secondary data from a broad cross-section of firms, we provide robust empirical support for our model. Our results highlight situations in which CMOs need to be wary of cuts to their marketing budget, and also provide a potential mechanism through which marketers can protect their budget in the presence of highly confident CEOs—through their own confidence levels.

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Notes

  1. Pressures to boost earnings number can also lead firms to engage in accrual-based earnings management (AEM). We provide an explanation on the differences between AEM and REM in our web appendix.

  2. See Zell et al. (2020) for a recent review of the literature in social psychology. The literature has also studied several psychological concepts related to confidence. In the web appendix, we clarify and distinguish confidence from the concepts of hubris, narcissism, and optimism.

  3. Although firms can also engage in AEM to change accounting earnings, Zang (2012) documents that REM tends to be the first course of action undertaken by managers under short-term pressure.

  4. This perception is reinforced by confident CEOs’ self-serving attributions, they believe that the current potential earnings shortfall is likely a stroke of bad luck or due to external factors rather than their own failings (Bazerman & Moore 2012). Therefore, confident CEOs tend to believe that the potential underperformance is a temporary aberration which they can easily turn around without having to alarm outside stakeholders and their board members.

  5. In our sample, we find similar patterns. Although annual grants of equity-based compensation are similar between CEOs and CMOs, CEOs hold at least four to five times more stock options than CMOs. This observation holds regardless of whether we are examining total option holdings or vested option holdings which are more affected by stock price movements (Souder & Shaver, 2010). These holdings are the accumulation of past and present stock option grants. As argued by Coles et al. (2006), focusing on the portfolio of current and past grants provide a much more precise measure of incentives compared to just looking at annual grants.

  6. Artz and Mizik (2017) find that increased CMO equity compensation increases the myopic marketing management tendencies of the CMO. This does not mean that CMOs have incentives to engage in myopic marketing actions on average. As discussed in footnote 5, compared to the CEO, the average CMO has limited incentives from their option holdings to engage in myopic marketing management and this incentive only increases as their equity compensation increases as Artz and Mizik (2017) show. Reinforcing the argument that the average CMO has limited incentives to engage in myopic marketing management is the results in Kaur et al. (2021) who show that CMO presence reduces firm propensity for REM such as cutting advertising expense. In our empirical model, we are careful to control for the equity incentives of both the CEO and CMO.

  7. Similar to the argument made for the CEO, one may be tempted to argue that a confident CMO would be willing to take a cut to the marketing budget today as they are confident that they can make up for it in the future. However, it is unclear why the CMO would be willing to cut marketing spending in the first place given the limited incentives from their stock options and the high cost of missing sales growth targets if marketing spending is decreased.

  8. We consider CMO power and confidence as two distinct traits. While one may argue that an increase in power naturally leads to an increase in confidence, the extant findings on the origins and antecedents for executive confidence is more complex and can be affected by many factors other than power (Heavey et al., 2022).

  9. Independent directors are directors who have no economic ties to the firm or top management outside their role as a director, and as such they are in a better position to credibly limit managerial discretion by punishing managers for unfavorable outcomes (Fama & Jensen, 1983). This contrasts with inside directors and affiliated directors who have conflicts of interest and therefore may not be effective monitors of the CEO.

  10. Independent directors are likely to respond to shareholder demands because of their reputational concerns and their primary role as monitors of the CEO (Fama & Jensen, 1983). Independent directors who are perceived to be doing the right thing by the market receive more favorable voting outcomes during director elections and are more likely to advance in their careers and get more board seats (Aggarwal et al., 2019).

  11. There is anecdotal evidence that the board of directors regularly reach out to members of the C-suite team other than the CEO. See for example, “Move Over CEO: Here Come the Directors,” Wall Street Journal, Oct. 9, 2006. Effective boards are also expected to reach out to the top management teams to ask for their feedback and perspective. See for example, this report by McKinsey & Company: https://www.mckinsey.com/~/media/mckinsey/featured%20insights/leadership/the%20board%20perspective/the-board-perspective.ashx

  12. As CMOs can have various titles, we classify an executive as a CMO if the job title includes keywords such as “CMO,” “MARKETING,” “MKTG,” MERCHANDISE,” “BRAND,” “CUSTOMER,” “PRODUCT,” and “ADVERTISING.” We went through the list of job titles with these keywords manually and exclude job titles that have these keywords but are not marketing related such as “PRODUCT OPERATIONS.” We also exclude job titles that have these keywords, but the keywords refer to certain segments of the business rather than the functional roles such as “VP OF CONSUMER PRODUCT GROUP,” “PRESIDENT OF GLOBAL PRODUCT,” “PRESIDENT OF FINISH LINE BRAND,” “GROUP PRESIDENT OF LICENSED BRANDS,” etc.

  13. In Compustat, R&D expenditure is included as part SG&A. Following extant literature such as Mizik (2010) and Chung and Low (2017), we set missing R&D expenditures to zero. This follows the convention in the literature that examines R&D spending because the U.S. Statement of Financial Accounting Standards No. 2 (SFAS2) requires a firm to only disclose material R&D expenditures in its financial statements. Therefore, firms with missing R&D are likely to have zero or immaterial R&D. In a robustness check, we include an indicator variable set to one if the firm has missing R&D when estimating Eq. (1), and results remain similar.

  14. Results are robust to not winsorizing the variables. In an additional check, we find similar results using robust regressions which are less susceptible to the effects of outliers.

  15. Executive characteristics such as tenure, age, and gender have been shown to have direct effects on the confidence level of an individual. For example, males are generally more confident than females (Huang & Kisgen, 2013), confidence increases with experience (Prims & Moore, 2017), and younger individuals tend to be more confident (Kovalchik et al., 2005). We have chosen not to control for these executive characteristics in the main specification because including these variables, which are correlated with confidence, may lead to over-controlling and take away the effects of our confidence variables, leading to Type II errors. Furthermore, controlling for these variables results in significant sample loss because of missing values for the CMO characteristics. Nevertheless, we control for the tenure, age and gender of the CEO and CMO in robustness checks.

  16. Such a result is consistent with papers who find that CEOs prefer to work with people who are similar to them (e.g., Westphal & Zajac, 1995). For example, Malmendier et al. (2020) find that highly confident CEOs are more likely to hire highly confident CFOs who share their views of the firm’s future profitability.

  17. For each segment in the Compustat segment files, firms may report both a primary SIC and a secondary SIC associated with each segment. The presence of a secondary SIC code indicates the firm’s segment is active in more than one industry. When defining peer firms, Germann et al. (2015) focus on only the primary SIC of each segment while we focus on both the primary and secondary SIC of each segment. We do so in order to capture the peripheral rivals of the focal firm in order to strengthen the exclusion restriction of Peer CMO presence. Our results, however, remain similar if we focus only on the primary SIC of each segment when defining peers.

  18. We also test for the endogeneity of CEO confidence in the subsample of firm-years with CMO presence. Our conclusion remains the same.

  19. We were not able to test for the endogeneity of CMO confidence as peer firm CMO confidence is a poor predictor of focal firm CMO confidence, and it is difficult to come up with a convincing instrument for CMO confidence that is both relevant and satisfy the exclusion criteria. However, to the extent that CEO confidence is not endogeneous, we can be more assured that CMO confidence is unlikely to be endogeneous as well. Furthermore, we are not testing for the main effects of CMO confidence but rather how it moderates the relationship between CEO confidence and myopic marketing management.

  20. Due to the high dimensionality when adding firm fixed effects, the joint estimation of the two stages of the Heckman selection model via full maximum likelihood estimation could not find convergence. Therefore, we use the two-step estimation method instead when adding firm fixed effects.

  21. We test whether the error terms in Eqs. 3 and 4 are correlated by reporting the correlation between the error terms, ρ, in the second last row and the associated significance level. As seen in the table, other than the specification in Column 4, ρ is not significantly different from zero in the other three columns, indicating that selection issues is not a problem.

  22. Please refer to the web appendix for details of the methodology.

  23. We also examine whether CMO lack of confidence matters (similarly defined as CEO confidence) but did not find any significant results. This is likely due to a power and selection issues as very few of our CMOs have information on the moneyness of exercised options (829 observations).

  24. To arrive at this estimate, we make use of the long-term value loss estimates in Mizik (2010) for the average firm. To be consistent with Mizik, we estimate a model of the likelihood of myopic marketing management and find the marginal effects of CEO confidence.

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Authors and Affiliations

  1. Essec Business School, Asia-Pacific, 5, Nepal Park, Singapore, 139408, Singapore

    Tuck Siong Chung

  2. Nanyang Business School, Nanyang Technological University, 50 Nanyang Avenue, Singapore, 639798, Singapore

    Angie Low

  3. Robert H Smith School of Business, University of Maryland, 3451 Van Munching Hall, 7699 Mowatt Lane, College Park, MD, 20742-1815, USA

    Roland T. Rust

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  1. Tuck Siong Chung
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  2. Angie Low
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Chung, T.S., Low, A. & Rust, R.T. Executive confidence and myopic marketing management. J. of the Acad. Mark. Sci. 51, 1118–1142 (2023). https://doi.org/10.1007/s11747-022-00909-z

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