Advertising and the impact on stock price accuracy

• Published date: 01 April 2021
• Author: Michael Hyman,Parvathi Jayamohan,Omar Watts
• Date: 01 April 2021
• DOI: http://doi.org/10.1002/jcaf.22488

Received:  September Accepted:  January 

DOI: ./jcaf.

BLIND PEER REVIEW

Advertising and the impact on stock price accuracy

Michael Hyman1Parvathi Jayamohan2Omar Watts3

Merrimack College, North Andover,

Massachusetts, USA

Salem State University, Salem,

Massachusetts, USA

St. John Fisher College, Rochester, New

Yor k, USA

Correspondence

MichaelHyman, Assistant Professor

ofAccounting, Merrimack College, 

TurnpikeSt., North Andover, MA, USA.

Email:hymanm@merrimack.edu

Abstract

This paper examines how advertising impacts the information environment in

which stocks are priced and whether it serves to benefit or obfuscate the stock

pricing environment. We find that advertising leads to stock prices which bet-

ter anticipate future earnings, suggesting that the information contained within

marketing campaigns is price relevant despite its potential for puffery. We find

that this result is concentrated in firms with greater information availability as

proxied by size and analyst coverage, more sophisticated investors, and periods

of low investor sentiment. Altogether,we find as the information environment is

richer and investors are more capable of utilizing financial information to invest,

advertising becomes a more useful tool in anticipating future operating perfor-

mance and creating accurate stock prices.

KEYWORDS

advertising, price informativeness, prices to earnings

1 INTRODUCTION

Our study investigates the impact of advertising on the

pricing environment of firms with a specific focus on

how advertising influences the relationship between stock

prices and future earnings. A fundamental relationship

within the accounting literature is that earnings are at least

partially anticipated by investors and included in stock

prices even before the earnings are officially announced.

This is because when an earnings announcement takes

place, it is summarizing events which have taken place

over the prior months, but investors price not only the

confirmation of a firm’s past performance, but also expec-

tations about the firm’s future. As a result, stock prices

provide a consensus view of a firm’s prospective earnings

performance and are found to be correlated with future

earnings (Collins et al., ). This relationship improves

when there is greater information available about the

firm by way of disclosures, company size, institutional

ownership, or analyst coverage as investors are better

able to anticipate future operations and earnings streams

before they are officially announced (Ayers & Freeman,

; Schleicher & Walker ).

Advertising is an important method of communication

used by firms to provide information to relevant stake-

holders. Yet, how the informational change brought about

through advertising influences investors’ pricing abilities

has to date been unexplored. If additive to the informa-

tion environment, for example, by disclosing information

on corporate strategyor new product lines, advertising may

result in improved price accuracy.Further, since firms with

less attention paid to them are known to havehigher future

returns as less future information is contained within the

stock price in the preceding periods, advertising may help

with stock price informativeness through price discovery

(Fang & Peress, ). Conversely, firms use advertising

to send a positive signal about their current and future

positions, and it is possible consumers, and by extension

investors, may not be sufficiently sophisticated to decipher

the signals being sent by firms’ advertising (Schauster &

Neill, ). If advertisingdoes not offer much in the way of

strategic information but is merely a conduit for optimism

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