This study investigated the dynamic and quadratic relationships between advertising and restaurant performance. For this investigation, three stage least squares estimation was adopted to analyze the advertising effects of 137 U.S. public restaurant firms from 1991 to 2016. Stock value, sales, and profitability were used as measures of restaurant performance. The findings showed the quadratic effect of advertising spending on all three performance measures, indicating that advertising effects change according to the level of firms’ advertising spending. The effect of sales and profitability on advertising spending was also significant, which supports their dynamic relationships in the restaurant context. Restaurant managers are advised to plan their advertising budget by taking into account their different performance goals and changing advertising effectiveness.

Introduction

Advertising has become greatly popular and even commonplace in the restaurant industry nowadays (Hyun et al., 2011). It has been widely recognized that advertising creates consumers’ product awareness and assists them in making informed purchase decisions; enhances consumer demands and improves profitability; and facilitates gaining competitive advantages over their rivals (Hsu and Jang, 2008; Park and Jang, 2012). Along with the increasing role and importance of advertising, the average spending on advertising per public restaurant firm has grown drastically from $12.2 million in 1991 to $48.1 million in 2016 (Computstat, 2017). According to AdvertisingAge (2015), the restaurant industry ranked fifth in advertising spending across all industries in the U.S. ($6,049 million), and the top restaurant advertisers include McDonald’s ($802 million), Starbucks ($445 million), and Taco Bell ($366 million). Despite the widespread prevalence of and enormous investment in advertising, few efforts have been devoted to investigating precisely the relationship between advertising and restaurant performance (Park and Jang, 2012). The primary approach of previous marketing and finance studies on this topic was to examine advertising effectiveness using accounting performance measures (e.g., sales and profitability) (Acar and Temiz, 2017; Cuaresma and Stoeckl, 2012; Kim et al., 2015; Tellis, 2009).