This dissertation comprises two essays on marketing-finance interface. The first essay examines the effect of advertising, a marketing variable, on liquidity risk, a financial market outcome. The second essay focuses on the impact of capital structure, a financial policy variable, on various marketing strategies.

Marketing actions can impact firm value through both product and capital markets. Recent literature in finance suggests that besides systematic market risk, liquidity risk - the non-diversifiable systematic risk that a firm’s stock may become illiquid in times of market stress - is also priced. In the first essay we examine more than 1,800 firms from 1971 to 2005 and show that advertising lowers liquidity risk by increasing the number of individual investors in a firm. The impact of higher advertising on liquidity risk is more pronounced for firms that are younger, operate in BtoC markets, and have advertising expenditures between about $ .5 million and $ 20 million. Simulations show that increasing advertising by 25% increases firm value by up to 1.4% just due to a reduction in liquidity risk. The results suggest that researchers and managers should consider the valuation impact of marketing activities via their effect on investors in capital markets.

In the second essay, we test the effect of firm’s capital structure on a firm’s customer satisfaction measured using American Customer Satisfaction Index (ACSI). We use data from more than 200 firms over a 15-years period spanning 1994 and 2008. We find that on average 20% increase in leverage (ratio of debt to firm value) results in 1 point decrease in customer satisfaction. The negative effect of leverage on satisfaction is present only for the firms that have few growth opportunities, supporting the notion that in such firms leverage prevents potential overinvestment in customer satisfaction. Our research presents a comprehensive picture of firm’s decision-making process to invest in long-term and short-term marketing strategies. The key insights from this research are (1) a firm’s financial policies can affect marketing strategies and (2) this effect may not always be value reducing.