Advertising, Attention, and Stock Returns

52 Pages Posted: 11 Feb 2009 Last revised: 16 Mar 2010

See all articles by Thomas J. Chemmanur

Thomas J. Chemmanur

Boston College - Carroll School of Management

An Yan

Fordham University - Gabelli School of Business

Date Written: February 10, 2009

Abstract

This paper studies the effect of advertising on stock returns both in the short run and in the long run. We find that a greater amount of advertising is associated with a larger stock return in the advertising year but a smaller stock return in the year subsequent to the advertising year, even after we control for other price predictors, such as size, book-to-market, and momentum. We conjecture that this advertising effect on stock returns is due to the effect of advertising on investor attention. Advertising could help a firm attract investors' attention. Stock price increases in the adverting year due to the attracted attention, but decreases in the subsequent year as the attracted attention wears out over time in the long run. We test this "investor attention hypothesis" using trading volume and the number of financial analysts covering to proxy for investors' attention on the firm's stock. We document five consistent findings. First, advertising increases a firm's visibility among investors in the advertising year. Second, an increased level of investor attention is associated with a larger contemporary stock return and a smaller future stock return. Third, the effect of advertising on stock returns is stronger in firms with more visibility in the advertising year. In particular, when a high advertising firm attracts more investor attention in the stock market, the stock return of the high advertising firm increases to a larger degree in the contemporary adverting year and decreases to a larger degree in the subsequent years. However, the stock return of such a high advertising firm decreases to a smaller degree if the attention attracted in the advertising year persists subsequent to the advertising year. Fourth, the effect of advertising on future stock returns is stronger if investors face a larger cost of arbitrage. Finally, we also find that the advertising effect is stronger for small firms, value firms, and firms with poor ex-ante stock performance or poor ex-ante operating performance.

Keywords: Advertising, Stock returns, Attention

JEL Classification: G31

Suggested Citation

Chemmanur, Thomas J. and Yan, An, Advertising, Attention, and Stock Returns (February 10, 2009). Available at SSRN: https://ssrn.com/abstract=1340605 or http://dx.doi.org/10.2139/ssrn.1340605

Thomas J. Chemmanur

Boston College - Carroll School of Management ( email )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

An Yan (Contact Author)

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
New York, NY 10023
United States
212-636-7401 (Phone)
212-765-5573 (Fax)

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