Is Investor Attention for Sale? The Role of Advertising in Financial Markets

• Author: MARINA NIESSNER,JOSHUA MADSEN
• DOI: http://doi.org/10.1111/1475-679X.12257
• Date: 01 June 2019
• Published date: 01 June 2019

DOI: 10.1111/1475-679X.12257

Journal of Accounting Research

Vol. 57 No. 3 June 2019

Printed in U.S.A.

Is Investor Attention for Sale? The

Role of Advertising in Financial

Markets

JOSHUA MADSEN

∗AND MARINA NIESSNER

†

Received 20 February 2018; accepted 7 January 2019

ABSTRACT

Prior research documents capital market benefits of increased investor atten-

tion to accounting disclosures and media coverage; however, little is known

about how investors and markets respond to attention-grabbing events that

reveal little nonpublic information. We use daily firm advertising data to

test how advertisements, which are designed to attract consumers’ attention,

influence investors’ attention and financial markets (i.e., spillover effects).

Exploiting the fact that firms often advertise at weekly intervals, we use an

∗Carlson School of Management, University of Minnesota; †AQR Capital Management.

Accepted by Haresh Sapra. We are grateful to Julie Goodrich at MediaRadar for as-

sistance acquiring the data used in this paper. We also thank an anonymous referee,

Phil Berger, Beth Blankespoor (discussant), Michael Chin, James Choi, Ted Christensen,

Ed deHaan, Will Goetzmann, Khaled Hussainey (discussant), Charles Jones (discussant),

Jung Koo Kang, Sam Melessa, Alan Moreira, Tyler Muir, Justin Murfin, Joseph Piotroski

(discussant), Jonathan Ross, Tjomme Rusticus, Matt Spiegel, Jake Thornock, Heather

Tookes, Brady Twedt, Tracy Wang, Tzachi Zach (discussant), Eric Zitzewitz (discussant),

and workshop/conference participants at Binghamton University, Yale SOM, Minnesota,

HKUST, Hong Kong University, National University of Singapore, CeFARR Conference,

BYU Accounting Symposium, Five Star Conference, NBER Behavioral Conference, Mid-

west Summer Research Conference, FARS 2018 midyear meeting, and LBS Accounting

Symposium for their comments. Marina Niessner gratefully acknowledges financial sup-

port from the Whitebox Advisors. AQR Capital Management is a global investment man-

agement firm, which may or may not apply similar investment techniques or methods

of analysis as described herein. The views expressed here are those of the authors and

not necessarily those of AQR. An online appendix to this paper can be downloaded at

http://research.chicagobooth.edu/arc/journal-of-accounting-research/online-supplements.

763

CUniversity of Chicago on behalf of the Accounting Research Center,2019

764 J.MADSEN AND M.NIESSNER

instrumental variables approach to provide evidence that print ads, especially

in business publications, trigger temporary spikes in investor attention. We

further find that trading volume and quoted dollar depths increase on days

with ads in a business publication. We contribute to research on how man-

agement choices influence firms’ information environments, determinants

and consequences of investor attention, and consequences of advertising for

financial markets.

JEL codes: G14; G41; M37; M41

Keywords: advertising; investor attention; spillover effects

1. Introduction

This paper examines whether advertisements influence investor attention

and financial markets. Investor attention plays an important theoretical

role in the acquisition and pricing of information.1Prior studies find

that increased investor attention to information events (e.g., earnings an-

nouncements, media coverage) is associated with improvements in price

discovery and liquidity (Hirshleifer, Lim, and Teoh [2009], Bushee et al.

[2010], Drake, Roulstone, and Thornock [2012], Blankespoor, deHaan,

and Zhu [2018]). Aware of these benefits, publicly traded firms often seek

to actively manage investor attention through, among other things, the

use of investor relations departments (Bushee and Miller [2012], Kirk and

Vincent [2014]), the timing of disclosures (deHaan, Shevlin, and Thornock

[2015]), and the use of social media (Blankespoor, Miller, and White

[2014], Lee, Hutton, and Shu [2015], Jung et al. [2017]).

In addition to these deliberate attempts to influence investor attention,

firms engage in a myriad of activities that, potentially inadvertently, could

also affect investor attention. We investigate whether advertising is one such

activity. Advertising is a firm-controlled activity that targets consumers, but

has the potential to simultaneously attract investors’ attention (Keloharju,

Kn¨

upfer, and Linnainmaa [2012], Lou [2014]). In the presence of atten-

tion constraints (Kahneman and Tversky [1979]), advertisements plausibly

remind current and potential investors about the company and can result

in increased search for financial information. However, because ads are

typically repetitive and likely reveal little nonpublic information, it is un-

clear whether ads cause any significant and measurable increase in investor

attention. Furthermore, because any advertisement-driven increase in in-

vestor attention is unlikely to be information-driven, it is unclear whether

or how such increased attention affects financial markets.

Because firms endogenously choose when, where, and how much to ad-

vertise, measuring the effect of advertising separate from correlated omit-

ted variables is challenging. For instance, if firms advertise following an

1See Merton [1987]; Hong and Stein [1999]; Hirshleifer and Teoh[2003]; Peng and Xiong

[2006]; and Hirshleifer, Lim, and Teoh [2011].

IS INVESTOR ATTENTION FOR SALE?765

attention-grabbing product announcement, the correlation between adver-

tising and investor attention using annual, monthly, or even weekly adver-

tising expenditures will likely be positive and could be misinterpreted as ad-

vertising attracting investor attention. To address such concerns, we exploit

variation in firms’ daily advertising activity to directly measure effects of ad-

vertising on investor attention and financial markets.2Our data contain a

comprehensive list of print advertisements placed by 637 publicly traded

companies in 39 daily newspapers between 2008 and 2013. The granularity

of our data allow us to measure changes in investor attention and financial

markets on ad days relative to non-ad days.

Despite the clear advantages of using daily data, ad days are a firm-level

choice and thus subject to endogeneity concerns. We therefore rely on an

instrumental variables approach to generate “quasi-experimental variation”

in advertising (Angrist and Pischke [2008, p. 122]). We document that firms

tend to advertise every seven days, with variation across firms regarding on

which day of the week they typically advertise. For instance, 79% of the 287

ad days for Oracle Corporation in our sample are Fridays, whereas 45% of

IBM’s 166 ad days are Tuesdays. We thus select as instrumental variables

indicators for whether the firm advertised exactly 7 or 14 days earlier. We

document that these instrumental variables are significantly associated with

the likelihood that the firm advertises on a given day (i.e., relevance con-

dition) and argue that they are also plausibly uncorrelated with omitted

variables that also affect investor attention and financial markets on ad days

(i.e., exclusion restriction, see Roberts and Whited [2013]).

We use these instrumental variables in two-stage least squares (2SLS)

regressions to analyze the effect of advertising on investor, rather than

consumer, attention.3Specifically, using daily Google searches for company

stock tickers (Ticker SVI) as a measure of retail investor attention (Da,

Engelberg, and Gao [2011], Drake, Roulstone, and Thornock [2012],

Madsen [2017]), we find that Ticker SVI spikes by 4.9% on company-specific

advertising days relative to nonadvertising days. In both the first-stage

and second-stage regressions, we include controls for media coverage of

the firm immediately before, on, and after the advertising day, as well

as additional controls for product launches on these days, earnings an-

nouncement dates, and EDGAR filing dates. We furthermore include both

firm-year and date fixed effects to control for unobservable differences

across firm-years and dates. Tests confirm that the instruments are not

weak and are valid (i.e., uncorrelated with the error term).

We subject these findings to a battery of robustness tests and exploit vari-

ation in advertisement type (e.g., full-page ads), placement (e.g., business

2Our use of ad-level data contrasts with related research that exploits variation in annual

advertising expenditures (e.g., Boyd and Schonfeld [1977], Grullon, Kanatas, and Weston

[2004], Chemmanur and Yan [2009], Lou [2014]).

3Importantly, we find qualitatively similar results using ordinary least squares (OLS) regres-

sions, suggesting that our findings are not driven by the use of instrumental variables.