Abstract
In this paper, we investigate whether and how product market advertising affects future stock price crash risk. We document robust evidence of a positive relation between intensive advertising and crash risk for a sample of Chinese non-financial firms with 12,489 firm-year observations. We find that a one-standard-deviation increase in product market advertising can lead to a 7.43–8.40% increase in future crash risk. We also find that the positive relation between product market advertising and crash risk is more pronounced for firms with a poorer information environment. Further analysis shows that intensive product market advertising affects future crash risk by diverting investor attention from bad news and fostering optimistic sentiments or bubbles.
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