Attracting Investor Attention through Advertising

Abstract

This paper provides evidence that managers adjust firm advertising, in part, to attract investor attention and influence short-term stock returns. First, I show that increased advertising spending is associated with a contemporaneous rise in retail buying and abnormal stock returns, and is followed by lower future returns. Next, I document a significant increase in advertising spending prior to insider sales, and a significant decrease in the subsequent year. Additional analyses suggest that the inverted-V-shaped pattern in advertising spending around insider sales is most consistent with managers' opportunistically adjusting firm advertising to exploit the temporary return effect to their own benefit. (JEL G12, G14)

Advertising, Attention, and Financial Markets

“…Although this is a "non-result", we think this finding is important as it casts serious doubts on the conventionally held view that advertising is an efficient way to boost short-term stock market valuations. 2 Thus, our results are in conflict with the arguments in Chemmanur and Yan (2011) and 1 See, e.g., Grullon, Kanatas, and Weston (2004), Frieder and Subrahmanyam (2005), Chemmanur andYan (2011), andLou (2014)) 2 Another argument could be made based on the idea that advertising can serve as a signal for product quality for potential customers (see e.g. Kihlstrom and Riordan (1984) and Milgrom and Roberts (1986)).…”

“…Understanding the impact of marketing on capital markets is important, as it might give rise to incentives for managers to use advertising in an opportunistic way. Consistent with this idea, Chemmanur and Yan (2009) and Lou (2014) find that managers increase advertising expenditures prior to initial or seasoned equity offerings of the firm and insider sales, respectively.…”

“…However, given that we find no impact of advertising on returns to start with, this line of reasoning seems less relevant here, too. Lou (2014), who find a positive relationship between changes in advertising and stock market returns in the same year. However, their studies are based on annual data and consequently could be subject to endogeneity problems.…”

“…Other studies that use advertising as a proxy for investor attention are Grullon, Kanatas, and Weston (2004) and Lou (2014). 5 However, these studies use low-frequency advertising expenditures.…”

“…Besides the study of Lou (2014) cited above, there are also papers that argue that firms use advertising strategically around IPOs and SEOs (Chemmanur and Yan (2009)), as well as M&A transactions (Hillert, Kunzmann, and Ruenzi (2014) and Fich, Starks, and Tran (2014)). Our results contribute to this literature by showing that managers might be wrong in believing that advertising helps to push-up short-term valuations.…”