Advertising and the Impact on Stock Price Accuracy

• In Event: Research with an Impact on Scholarship: Recognition, Valuation and Market Timing

Abstract

This paper examines whether corporate advertising leads to an obfuscation of the information environment which makes investors less capable of independently evaluating stocks. We find evidence that when firms advertise more, their stock prices become less correlated with future earnings streams, suggesting that investors are influenced by advertising’s optimism inducing effects and less capable of anticipating corporate performance. In addition, we find that the disharmony between current returns and future earnings from advertising leads to future stock returns which underperform the market. The result seems concentrated in large, growing firms with relatively lower institutional ownership. Overall, these results suggest that advertising can be an influencing factor in how accurately stocks reflect a company’s financial future.

Authors

• Michael Hyman, Merrimack College

• Parvathi Jayamohan, Salem State University