Advertising and the impact on stock price accuracy

Abstract

This paper examines how advertising impacts the information environment in which stocks are priced and whether it serves to benefit or obfuscate the stock pricing environment. We find that advertising leads to stock prices which better anticipate future earnings, suggesting that the information contained within marketing campaigns is price relevant despite its potential for puffery. We find that this result is concentrated in firms with greater information availability as proxied by size and analyst coverage, more sophisticated investors, and periods of low investor sentiment. Altogether, we find as the information environment is richer and investors are more capable of utilizing financial information to invest, advertising becomes a more useful tool in anticipating future operating performance and creating accurate stock prices.

Consumer skepticism, advertising regulation, and the internet: Questions worth exploring

“…In contrast, Hyman et al (2021) suggest that even in the context of today's remarkably rich consumer information landscape, advertising provides incrementally useful information relevant to consumer decision making. These authors argue that advertising is most effective in a rich information environment.…”

“…“In the age of paid, owned, and earned media, the distinction between advertising and other forms of marketing communication may blur…” (Marks et al, 2019, p. 259), but for the purposes of the present commentary, “[a]dvertising is [defined as] a paid, mediated form of communication from an identifiable source, designed to persuade the receiver to take some action…” (Richards & Curran, 2002, p. 74). Advertising is therefore a distinct but important component of the consumer information landscape (Dommett, 2019; Hyman et al, 2021)—a component that has, historically, been regulated actively (Murphy & Wilkie, 1990; Petty, 2015). Advertising regulation now encompasses the content and execution of commercial communications conveyed on the internet and in traditional media (Federal Trade Commission, 2022).…”