Advertising, Investor Attention, and Stock Prices: Evidence from a Natural Experiment

Abstract

Determining whether advertising affects stock prices through an investor attention channel is difficult because firms’ advertising, investors’ attention, and stock prices are all likely influenced by changes in firm fundamentals. I isolate the effect of advertising on investor attention and stock prices using events that place firms’ advertising in front of millions of Americans for reasons unrelated to firm fundamentals. Following the events generating the most advertising exposure, firms’ stocks experience large increases in investor attention, abnormally high turnover, and temporary price pressure. Retail investors are net buyers, whereas institutional investors’ selling drives the subsequent reversal towards fundamental values.

Keywords: advertising, investor attention, market efficiency, stock price, retail investor, institutional investor, natural experiment

JEL Classification: G12, G14, G11, M37