Attracting Investor Attention through Advertising By Dong Lou

This paper provides empirical evidence that managers adjust firm advertising expenditures to influence investor behavior and short-term stock prices. First, this paper shows that increased advertising spending is associated with individual investor buying and a contemporaneous rise in abnormal stock returns, which is then reversed in subsequent years. Second, there is a significant rise in firm advertising expenditures prior to insider sales and seasoned equity offerings. This large increase is followed by a significant decrease in advertising expenditures in the subsequent year. This pattern of advertising expenditures is consistent with the idea that managers are exploiting the return effect induced by advertising to the benefit of the existing shareholders and/or themselves. ∗This paper is based on a chapter of my doctoral dissertation at Yale University. I thank Ulf Axelson, Nick Barberis, James Choi, Lauren Cohen, Will Goetzmann, Robin Greenwood, Gur Huberman, Byoung-Hyoun Hwang, Li Jin, Dasol Kim, Peter Kondor, Andrew Metrick, Phil Ostromogolsky, Antti Petajisto, Christopher Polk, Laura Starks, Paul Tetlock, and seminar participants at the London School of Economics and Yale School of Management for helpful comments. All remaining errors are my own. †Department of Finance, London School of Economics and Political Science, Houghton Street, London WC2A 2AE. Email: [email protected], Tel: +44 (0)20 7107 5360.