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Oct 12

Maximizing Short Term Stock Prices Through Advertising

Posted by abiao at 15:02 | Others | Comments(2) | Reads(6077)
Just got back from a very interesting seminar about a working paper of Dong Lou, an assistant professor at LSE, maximizing short term stock prices through advertising, also named Attracting Investor Attention through Advertising.

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.

More importantly to retail investors, the paper shows the stock return of those firms with increasing advertising expentiture is higher than those without. Read yourself at http://personal.lse.ac.uk/loud/advertising.pdf

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