A Research Note: Extracting Value Relevance from Advertising Expenditures — Endogeneity Issues and Insider Trading
33 Pages Posted: 2 Feb 2016
Date Written: February 1, 2016
Using a vector error correction model (VECM) and data from a period with high unreported intangible values, we show how to control for endogeneity feedback between capital expenditures (CAPX), research and development (RAND), and advertising (ADVT). We find increased ADVT induces excess returns in manufacturing firms, with ADVT, CAPX and RAND at equilibrium in the services sector. Corporate insiders are able to use their private knowledge of the quality of ADVT expenditures to rent extract, with a zero-cost tracking strategy earning excess returns of 22.5 percent over 60 days. Finally, analysts are attracted to firms with a high level of ADVT and they impart additional price sensitive information into the market. Our methods are informative to researchers for controlling reverse causality and to investors and internal management about the conditional long term quality of intangible expenditures.
Keywords: advertising and insider trading, reverse causality between intangibles, endogeneity feedback, insider accounting arbitrage, VECM trading signals
JEL Classification: G14, M37, M41
Suggested Citation: Suggested Citation