The Effect of Product Placement Advertisement Legalization on Firms ’ Sales Growth : Evidence in Korea

This study investigates the effect of PPL (Product Placement) advertisement in Korea on listed firms’ sales growth in an empirical way. Most existing literatures argue that PPL advertisement brings negative impacts on sales of PPL products theoretically. It is difficult to find studies of examining the effect of PPL advertisment to sales growth empirically. Thus, from the listed firms’ financial data, this study examines the change on sales pre and post PPL advertisement legalization periods in Korea. Korea is selected for the sample of this study, because Korea provides a good research setting for watching the PPL effectiveness; PPL advertisement has been legislated in Korea since 2010. In the past, the way to advertising through broadcasting was very limited so that some advertisements were illegally prevalent, but the PPL legalization allows that the advertisers more freely expose their products in various ways. For testing the effectiveness of PPL advertisement after the legalization, unique dataset of listed firms in Korea are collected. As a result, this study supports that there is a significantly negative association between PPL advertisement legalization and firms’ sales growth rate. This negative association is still robusted when firms increases their advertsiment expenses. This implies customers are possible to receieve a negative impression from direct exposure of PPL advertisement. This result warns about the riskiness of exposing products indiscrimately through media content.


Introduction
In recent years, Korean media content including TV drama and TV shows has made a cultural boom in overseas countries under the name of "Korean Wave (Chua & Iwabuchi, 2008)."This movement led Korean government supportive interventions on entertainment industry aimed for producing "quality media content" (Kwon & Rhee, 2014).Korean broadcasting industry has likely to be high level of capital dependence on advertisement comparing with major G7 countries (Byun & Lee, 2013).Accordingly, Korean government gradually eases off the restrictions on advertisement, and one of the most representative case is to legalize PPL (Product Placement) in 2010.PPL is an advertising strategy which exposes specific products or brands within the public TV channels.Before the PPL legalization, it is prohibited to expose the products' logos or brands directly on TV screen in Korea.Although actors can wear a genericided brandnew shoes on TV but the logo of the product must be hidden; they usually cover the logo or brand name by carton sealing tape or paper stickers.Nevertheless, the those products have been affected on their sales growth; many of those "unintended PPL" products on TV shows has been usually listed in top ranks on search portal sites after the exposure.This implies that the PPL advetisement method is able to stimultate many TV show viewers' curiosity about the PPL products (Yu, 2003).
The legislation about PPL advertsiment in 2010 makes the brand names display more explicitly in broadcasting media content.Consumers do not need to make an extra effort to find about the product which they have seen on TV.However, according to the survey data from Trendmonitor (www.trendmonitor.com), as the frequency of PPL exposure increases, viewers' general advertising affinity about PPL products decreases (Acrofan Editorial Department, 2014).This could imply that deregulation of PPL advertisement makes the effectiveness of PPL less influential.This study tests whether PPL legalization makes an signifinace influence on the effectiveness of PPL advertsiment through the quantitative data analysis.Many of the existing literatures have argued that PPL advertisement legalization brings negative impacts on image of PPL products to viewers theoretically.However, the empirical studies examining the effect of PPL advertsiment to firms' performance are very few.Thus, in this study, listed firms' financial data are collected and the changes on sales before and after PPL advertisement legalization are examined.
Korea especially provides a great research setting to examine the effectiveness of PPL advertsimenet due to the influence of the PPL advertisement legalization in 2010.In the past, advertisers are allowed to only expose their products in very limited ways such as notifying numer of sponsoring company names in the very last part of TV shows (Noh et al., 2014).After the legalization, advertisers tend to use PPL advertising more explicitly; some of shows even include product use directions in the dialogues.Since it is difficult to find studies have done with the association between PPL legalization and firm performance.This study would suggest a new strategic direction to the advertising and broadcasting industry.For testing the effect from the PPL advertisement legalization in Korea, unique dataset of listed firms in Korea are collected.
The remainder of this paper is as follows.In section 2, prior studies are reviewed and developing hypotheses are introduced.In section 3, the research method and sample are described and in section 4, our empirical findings are presented.Finally, in section 5, conclusions and implications from the findings are drawn.

Definition of Product Placement
The definition of PPL is an advertising form of exposing specific products or brands within a play paying for price to the movies or TV programs (Ahn, 2002;Baker & Crawford, 1995;Clark, 1991;Karrh, 1998, Lee & Kim, 2000;Lee & Nam, 1999).The advertisers expect the effect of public relations from natural settings of PPL showing their hidden advertising messages or images (Balasubramanian, 1994;Cha, 2001;I. Lee, 2000;A. Lee, 2004;Nebenzahl & Secunda, 1993).Thus the advertisers hide their PPL advertising in visual sets such as props and background or in actors explaining about sponsored products or mentioning certain brands in a play (Y.Lee, 2005;Park, 2004;Steortz, 1987;Russel, 1998).Eventually, PPL is marked by unavoidable advertising to the customers because the products place in a quiet way in the contents such as movies or TV shows (Korean Broadcast Advertising Corp., 2005).
The effect of PPL has been proved through the middle 20th century Hollywood movies; ACE comb, which James Dean used for sweeping his hair in the movie 'Rebel without a cause (1955)', was in fashion among young men; M&M Chocolates obtained result of raising its rate of sales about 65% above from PPL in 'E.T. (1982)'; and there are a lot more beneficiary cases of PPL like Coke, Raybans and so on (Kim, 2013;Nebenzahl & Secunda, 1993).
In case of Korea, indirect advertisement, including PPL, was prohibited in principle until 2009, but it substantially had been enacted from sponsorship notification system.Then from 2010, indirect advertisement has been legally allowed for the purpose of advertising market extension, alternative financial resources for broadcasting industry, and reinforcement of the capability in broadcast-production (H.Lee, et al., 2011).In Korean Broadcasting Act, the PPL related provision was built -proclaimed in 2009, and enforced in 2010, and its detailed regulations of enforcement such as permissible ranges and proper ways were newly arranged through enforcement ordinance.The Korean Broadcast Advertising Corporation (KOBACO), in the initial step of the act, classified indirect advertising expose standards into 5 levels: 'if the brand is exposed', 'if the product exposed', 'if the product exposed by supporting actors', 'if the product exposed by main actors', and 'if the product or brand effectiveness to the storyline'.This, in other words, can be read that indirect advertisement has different effectiveness depending on exposure degree and expression type (Kim & Bong, 2013;S. Lee, 2014).The current the expose level for indirect advertisement is classified into three levels of 'if the brand or product is simply placed', 'if characters interact with the product', and 'if the brand or product relate to the storyline'.

Hypothesis
Existing literatures argue that indirect advertisement is very efficient to promote viewers' interests on PPL products (Yu, 2003;Lee, 2014).Yu (2003) reports that the advertsiment effect on PPL products is more effective when PPL products' logos or brands are veiled rather than are unveiled.Also, S. Lee (2014) mentions that some advertisers attempt to cover their products' logos or brands intentionally for drawing viewers' interests on the products.
Studies on PPL advertisment have not produced conclusive empirical results but many theory or survey studies argue that PPL advertisment diminishes viewers' curiosity from excessive exposure of PPL products.Thus, the negative association between PPL legalization and firms' sales growth in Korea is predicted.Hence, the first hypothesis is as follows: H1: PPL legalization is negatively associated with fims' sales growth.
Many companies make huge expenses on advertisement of their products for boosting up their sales.In other words, firms' sales soars as advertsement expenses increases.Then, advertisment expenses should be positively associated with advertsements expenses.However, if PPL advertisment brings negative impacts on firms' sales, PPL legalization with advertisment expenses growth is still negatively associated with firms' sales growth.

Regression Model
To test out hypotheses on the association between PPL legalization and firms' sales growth, this study constructs an indicator variable (PPL) that equals to one if PPL is legalized (PPL advertisement); zero otherwise (The other indirect advertisement).Also, it adds advertisement expenses growth (△ADE) and interaction term of advertisment expenses and PPL legalization (PPL*△ADE) to examine the association between advertisment expenses growth and sales growth before and after PPL legalization.This study uses control variables which can affect sales growth as follows.To control firm size (SIZE), it takes the logarithmic value of total assets.Market to book ratio (MB) and return on assets (ROA) are a measure of firm's performance which can affect firms' sales growth.Leverage (LEV) and operating income's volitility (OIVOL) can also affect to firms' sales growth.Lastly, it adds year dummies (Year Dummies) and industry dummies (Industry Dummies) to control year effect and industry effect.= Natural log of the total assets in t+1.

MB t+1
= The logarithmic value of market to book ratio in t+1.

OIVOL t+1
= The standard deviation of operating income scaled by average total assets from at least past two years up to five years in t+1.
Year Dummies = Year dummy variables.

Industry Dummies
= Industry dummy variables.

Sample Selection
The

Univariate Analysis
Table 3 gives the Pearson correlations among main variables.In this table, advertisement expenses growth is postively correlated with sales growth in 1% significant level.However, PPL legalization is insiginificantly associated with sales growth.Control variables are positively or negatively associated with sales growth in 1% significant level.However, the implication of the univariate result is limited.Therefore, this study performs multivariate regression analyses to examine the overall association between PPL legalization, sales growth, advertisement expenses growth, and other variables.The result of multiple regression analysis is reported on 4.3.Note.Table 3 presents Pearson correlation among PPL legalization, sales growth, advertisement expenses growth, and other variables.Please refer to the note of Table 2 for the definition of the main variables and control variables.T-statistics are reported in bracket.

Multivariate Analysis
Table 4 presents the result from the overall association between PPL legalization (PPL), advertisement expenses growth(△ADE), and sales growth(△SALES).Model (1) in Table 4 shows that the coefficient on PPL is negatively associated with △SALES at one percent or less of significant level (t-stat = -9.00)including control variables.The negative association implies that PPL advertisement makes negative influence on firms' sales growth after PPL legalization.This is an empirical result of supporting H1.Also, it supports the argument of prior thory and survey studies that PPL advertisement is less effective.Model (2) reports that advertisement expenses growth is positively correlated with sales growth.It implies that firms' sales increases as they make more advertisement expenses.In Model (3), the negative association between PPL and △SALES is still robust after it controls for advertisement expenses.Also, it includes the key interaction variable of PPL*△ADE in Model 3.This study finds that the key interaction term (PPL*△ADE) is negatively associated with △SALES at five percent of significant level (t-stat=-2.22).The explanation of the negative association is that PPL advertisement is less effective to increase sales when the companies make more advertisment expenses.In order to check multicolliearity problem, variance inflation factor (VIF) is reported in Table 4.The maximum VIF of model ( 1), (2), and (3) are 4.08, 1.29, and 4.12 respectively.Since maximum VIF is lower than 10, there is a quite low possiblity of the multicollinearity problem in the models (Rhee et al., 2012).

Conclusion
This study aims to explore the effectiveness of PPL advertisement with an empirical approach.From the result of regression analysis, this study finds a negative association between PPL legalization which allows direct advertisement and sales growth.This suggests that in the current Korean market, PPL advertisement is less effective than other indirect advertising methods.This can be read as viewers are possible to receive a negative impression from excessive product exposures in media contents.The result of emparical analysis supports the prior theoritical studies which warn about a negative influence from the abuse of PPL advertisement.
This study, however, may have limitations under following caveats.First, there is always the possibilities of that the result value is depended on measurement criteria or time period and there may be other omitted factors which bias our empirical results.Second, most firms do not disclose their specific lists of advertisements so that the portion of PPL advertisement expenses among total advertisments costs is difficult to be estimated accurately.If each firm's expenses allocated to PPL advertisement are not practically proportional to its total advertisement expenses, it is challenging to argue that the suggested result can be generalized into a broader set of firms.
Despite these caveats, this study contributes to the literatures by investigating the effectiveness of PPL advertsiments empirically.The empirical results academically support the understandings of the effect of PPL legalization.In practice, the result of this study would be useful to advertisers for building strategies.
△ADE t + β 4 SIZE t+1 + β 5 MB t+1 + β 6 ROA t+1 + β 7 LEV t+1 + Sales growth.(Sales t+1 -Sales t )/Sales t = Advertisement Expenses growth.(ADE t -ADE t-1 )/ADE t-1 PPL*△ADE t = Interaction term of PPL t and △ADE t Control Variables SIZE t+1 This table show sample distribution of 11,006 firm-year observation used in the main empirical tests.Industry definitions are based on the KSIC-9 (Korea Standard Industrial Classification).Table2provides descriptive statistics for the variables.Due to skewness, the variables are winsorized at the one percent level.Mean (median) of sales growth is 0.128 (-0.045).Average (median) of advertisement expenses growth is 0.644(-0.333).Average of PPL is 32.6%.PPL advertisement is legalized in 2010.Among total sample years (2003 to 2012), year 2010, 2011, and 2012 are belongs to the PPL legalization periods.Mean (Median) of control variables (SIZE, MB, ROA, LEV, and OIVOL) are generally consistent with prior evidence.Note.This table presents descriptive statistics of the mean, median, and distribution of main variables used in this study.All variables are winsorized at top and bottom 1% of the pooled data.△Sale: Sales growth.△ADE: Advertisement expenses growth.PPL: An indicator variable if PPL is legalized; 0 otherwise.SIZE: Natural log of the total assets.MB: The logarithmic value of market to bbok ratio.ROA: Return on assets.LEV: Leverage; Liabilities scaled by total assts.OIVOL: The standard devidation of operating income sacled by average total assets.
non-financial industry; (4) fiscal year ended December 31.This process yields final sample of 11,006 annual firm-year observations from KOSPI / KOSDAQ listed companies between 2003 and 2009.Table 1 shows the sample distribution by year by industry for the hypotheses tests.It presents the observations by year in [Panel A] and by number of industry in [Panel B] respectively.

Table 3 .
Pair-wise Correlations among main variables

Table 4 .
Regression results for Analyst Coverage and Audit Hour This table presents the results of regressions of the analyst coverage and audit hour with a set of control variables.See the notes of Table 2 for the definitions of the variables.T-statistics are reported in bracket.***, **, * indicate, respectively, the significance level at the 1%, 5% and 10% level or better.The regression equations are as follows.