Firing advertising agencies - possible reasons and managerial implications

In this study we examine the possible reasons for the firing of ad agencies and relate these reasons to the stock price consequences of the firings using event-study methodology. After analyzing a variety of performance measures for profitability, sales, and market share of the client firms prior to the firing, we find that firms that fire their ad agencies have lost market share in the two quarters immediately preceding the firing. We report here, for the first time, that the fall in the stock price of client firms is significantly related to the fall in market share preceding the firing. Previously published research on ad agency firings has shown that the stock price of client firms falls just prior to the announcement of the ad agency firing. We confirm that result using a larger sample of firms over a longer period of time and then extend it to include the stock price impact on fired ad agencies (price falls) and their replacement ad agencies (price rises). In addition, the managerial implications of our results for ad agencies, for their clients, and for researchers are discussed.