A Research Note: Extracting Value Relevance from Advertising Expenditures — Endogeneity Issues and Insider Trading

33 Pages Posted: 2 Feb 2016

See all articles by Allan Hodgson

Allan Hodgson

University of Queensland - Faculty of Business, Economics and Law; Financial Research Network (FIRN)

Suntharee Lhaopadchan

Kasetsart University - Faculty of Management Sciences

Raluca Ratiu

IE University

Date Written: February 1, 2016

Abstract

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

Hodgson, Allan C. and Lhaopadchan, Suntharee and Ratiu, Raluca, A Research Note: Extracting Value Relevance from Advertising Expenditures — Endogeneity Issues and Insider Trading (February 1, 2016). Available at SSRN: https://ssrn.com/abstract=2725784 or http://dx.doi.org/10.2139/ssrn.2725784

Allan C. Hodgson

University of Queensland - Faculty of Business, Economics and Law ( email )

4072 Brisbane, Queensland
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Suntharee Lhaopadchan (Contact Author)

Kasetsart University - Faculty of Management Sciences ( email )

199 Sukhumvit Road
Thungsukhla
Siracha, Chonburi 20230
Thailand

Raluca Ratiu

IE University ( email )

Castellón de la Plana 8
Madrid, 28006
Spain

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