Maximizing Short-Term Stock Prices through Advertising

Abstract

This paper provides evidence that managers use firm advertising, in part, to maximize short-term stock prices. First, this paper shows that increased advertising spending is associated with individual investors' intensified buying activities, as well as a contemporaneous rise in abnormal stock returns that is subsequently reversed. The paper further documents a significant increase in advertising spending prior to insider sales and seasoned equity offerings, but a significant decrease in the following year. Using the vesting of restricted shares held by top executives as an instrument for insider sales, I show that the inverted-V-shaped pattern in advertising spending around equity sales is most consistent with managers' exploiting the temporary stock return effect of advertising to their own benefit and, potentially, to that of existing shareholders.