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, the paper shows that increased advertising spending is associated with a contemporaneous rise in retail buying and in abnormal stock returns, and is followed by lower future returns. Next, the paper documents a significant increase in advertising spending prior to insider sales, and a significant decrease in the following year. A similar pattern arises around equity issues and stock-financed acquisitions, but is absent around debt issues and cash-financed acquisitions. Additional analyses suggest that the humpshaped pattern in advertising spending around equity sales is most consistent with managers’ opportunistically adjusting firm advertising to exploit the return effect to the benefit of their own and that of their existing shareholders.