Trade with Ads
49 Pages Posted: 2 Nov 2018 Last revised: 1 Dec 2018
Date Written: November 30, 2018
This paper tests the theoretical prediction that uninformed trading encourages informed trading and increases stock price efficiency. Based on the observations that retail trading spikes on advertisement days and that firms frequently advertise at weekly intervals, we introduce an instrument—the existence of a product market ad seven calendar days earlier—to capture uninformed retail trading. Instrumented retail trading is positively associated with informed trading and stock price efficiency, suggesting that informed investors exploit increases in uninformed trading on recurring ad days and trade accordingly, and that their trading in turn accelerates the incorporation of private information into stock prices. Image analysis that strictly curtails the information content of recurring ads yields similar results.
Keywords: Advertisement, Noise Trading, Uninformed Trading, Informed Trading, Retail Trading, Institutional Trading, Stock Liquidity, Price Efficiency, Image Analysis
JEL Classification: G10, G12, G14, G23, M37
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