Abstract
We analyze whether product market advertising has a spillover effect on stock price synchronicity by transmitting firm-specific information to the capital market and attracting more investor attention. Using a sample of Chinese listed firms from 2009 to 2017, we find that firms with greater advertising expenditures have lower stock price synchronicity. The results are robust after we address endogeneity concerns. In accord with our hypothesis that product market advertising increases the amount of firm-level information capitalized into stock prices through the information channel, we find that the impact of advertising on synchronicity is more pronounced for firms with a higher degree of information asymmetry and firms in the consumer-product industry. Further tests show that product market advertising enhances the ability of current period returns to reflect future earnings, and thus rules out that the negative relationship between advertising and synchronicity is driven by noise trading. Our results imply that product market advertising plays an informative role and improves information efficiency in a capital market.
Highlights
Product market advertising is a key mechanism for firms to convey information to the consumer (Nelson 1974)
Using firms covered in the China Stock Market and Accounting Research (CSMAR) database from 2009 to 2017, we find that the average advertising expenditure of firms listed on China’s stock exchanges shows an upward trend from 2009 to 2017—from RMB16.9 million in 2009 to RMB85.9 million in 2017
We find that advertising has a stronger informative effect in consumer-product industry because more investor attention can be grabbed by advertising for consumer products
Summary
Product market advertising is a key mechanism for firms to convey information to the consumer (Nelson 1974). We examine how the advertising intensity affects the information asymmetry between the firm and outsider investors, and how the product market advertising affects a firm’s stock price synchronicity.
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