No abstract

Dong Lou has been teaching at the London School of Economics since July 2009. He earned a Ph.D. in Finance from Yale University and a B.S. in Computer Science from Columbia University. Lou's research mostly focuses on understanding market inefficiencies, and their distortionary effects on resource allocation (such as capital and managerial effort) in the real economy. In his Ph.D. dissertation, Lou shows that mutual fund investment-flow induced trading can have a long-lasting return effect in the stock market. In some follow-up projects, Lou further studies the potential effects of such temporary price pressure on firms' debt financing and investment decisions, and firms' interactions with non-equity stakeholders, such as suppliers and customers. Any opinions expressed here are those of the authors and not necessarily those of the FMG. The research findings reported in this paper are the result of the independent research of the authors and do not necessarily reflect the views of the LSE.

This paper provides evidence that managers adjust firm advertising, in part, to attract investor attention and influence short-term stock returns. First, I show that increased advertising spending is associated with a contemporaneous rise in retail buying and abnormal stock returns, and is followed by lower future returns. Next, I document a significant increase in advertising spending prior to insider sales, and a significant decrease in the subsequent year. Additional analyses suggest that the inverted-V-shaped pattern in advertising spending around insider sales is most consistent with managers' opportunistically adjusting firm advertising to exploit the temporary return effect to their own benefit. (JEL G12, G14)

Group, and Point72 Asset Management for helpful comments. We thank Andrea Frazzini, Ken French, and Sophia Li for providing data used in the analysis, Huaizhi Chen and Michela Verardo for assistance with TAQ and Conrad Landis for assistance with TRTH. Financial support from the Paul Woolley Centre at the LSE is gratefully acknowledged.