The Effects of Advertising Expenditures on Financial Performance of Commercial Banks

Commercial banks that mediate the process of collecting financial resources and transferring them to those in need of funds is one of the most important institutions of the financial system. Commercial banks are financial service businesses that are established with a profit motive, accept deposits, and provide loans. Commercial banks with almost the same product and service structure as each other uses advertising and similar promotional efforts as a tool in order to introduce the services they produce to its existing and potential customers, to be preferred by the target audience, and to increase their sectoral competitiveness. Advertising is a promotional activity that allows potential buyers to think and act positively towards the products and services offered by the company in line with a plan, and thus enable more profit. It is seen that advertising activities are an important expense factor as well as the advantages they provide to commercial banks. Advertising increases the fixed costs of the company as a promotional method that increases the cost of the product or service it is applied to. Despite its cost-increasing effects, banks may shift right the market demand curve for the product by changing the preferences of consumers with a correct advertising strategy. An effective advertising campaign may lead to increased revenue by shifting demand to right, may lower the price elasticity of demand, leading to increased profitability, and may lead to market concentration by blocking the entry of new companies into the industry. On the other hand, in case of all banks advertise simultaneously in the industry, it may not be possible to change the request through advertising. In this case, banks act with the motive of protecting their market shares rather than earning profit through advertising. With an oligopolistic approach, without an agreement between banks, companies are not expected to reduce their advertising spending. In this study, whether there is a relationship between the advertising spending of banks and their financial ratios is analyzed with reference to the samples of 21 commercial banks operating in Turkey. Seven different models (quarterly data set covering the period 2007-2017) to measure the effect of bank advertisements on financial performance were analyzed using the second generation panel data methodology. According to the results obtained, the effect of advertising spending on financial performance differs on a bank basis. While advertising expenses for some banks contributed positively to financial performance, it has been determined that the aforesaid effect was negative for some banks. Besides, it has been determined that advertisements have an effect on maintaining the market share of banks in the deposit and credit axis rather than financial performance. Keywords: Spending of Bank Advertisement, Financial Performance, Second Generation Panel Data Analysis