The Advertising Disclosure Choice

Abstract

We investigate why some firms, even those with substantial advertising activity, often do not specify these expenditures in their financial statements. Prior research suggests that this practice could maximize shareholder value by protecting proprietary information. Alternatively, managers might withhold advertising expenditures to obscure performance and manage market expectations. Using a comprehensive sample of US public firms, we find that non-specification of advertising creates significant information friction. Unspecified advertising firms face more advertising-related questions during conference calls than their disclosing peers. Yet, their managers provide limited responses to these questions. Analysts’ forecasts for unspecified advertising firms show greater forecast dispersion and more pessimistic estimates than their disclosing peers. Additional tests support the managerial protection hypothesis: CEOs early in their tenure appear more likely to withhold advertising cost details, with this effect most evident in industries characterized by frequent executive turnover. To ensure robustness, we manually collect marketing-related expenses from 10K filings not captured by Compustat’s advertising expense measure and find consistent results. Our evidence suggests that managerial career concerns appear to influence advertising disclosure choices. 

Keywords: Advertising, materiality, stock pricing, stock analyst, conference calls

JEL Classification: G30, M30, M41, L51,