Advertising, Breadth of Ownership, and Liquidity

Abstract

We present evidence that product market advertising has a direct effect on a firm's breadth of ownership and on the liquidity of its common stock. We find that firms that spend more on advertising, ceteris paribus, attract a significantly larger number of both individual and institutional investors. We also find that advertising reduces trading costs without adversely affecting trading activity, consistent with the idea that advertising mitigates adverse selection. These results suggest that a firm's advertising not only serves to inform potential consumers of the firm's products but also serves to increase the visibility of the firm among capital market investors.

JEL Classification: G10