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Do stock prices undervalue investments in advertising?

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Under the efficient market hypothesis, the stock price incorporates the full value of a firm’s advertising. If so, advertising spending should not be associated with future abnormal stock returns. Nevertheless, from 1995 to 2015, advertising spending often leads to abnormal stock returns the following year. The strongest results surface for consumer goods and services where advertising used to build brand equity can carryover from one year to the next. No significant differences arise for healthcare, industrial goods, or retailer advertising. Healthcare and industrial goods advertising is often modest. Retailer advertising that builds traffic should have little if any carryover into the following year. These results may help marketing managers defend an advertising budget whose benefits carryover into the following year, but hurt current profits. Having more investment analysts on Wall Street with a marketing background should help reduce this overly conservative “wait and see” discount for carryover advertising.

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  1. Prior studies in the finance and accounting literature often exclude regulated utility firms (SIC 4900–4999) and financial institution (SIC 6000–6999). Financial firms are excluded because their high leverage does not have the same meaning as for nonfinancial firms, where high leverage often indicates distress.


  3. While some firms in the services group provide business services, the majority provide consumer services.

  4. See Fama and French (2015) for a complete description of the SMB and HML factor returns.


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Correspondence to William T. Robinson.

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Oh, Y.K., Gulen, H., Kim, JM. et al. Do stock prices undervalue investments in advertising?. Mark Lett 27, 611–626 (2016).

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