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Product market advertising and corporate bonds

Author

Listed:
  • Nejadmalayeri, Ali
  • Mathur, Ike
  • Singh, Manohar

Abstract

Research shows that by enhancing visibility, advertising improves stock liquidity and returns. Unlike stock holders, bond holders may view advertising skeptically. Without proven effectiveness in improving revenues, large pre-interest advertising expenditures can be seen as eroding a firm's ability to meet its debt service obligations. We find that although greater advertising by a firm improves liquidity of its bonds in the market, it does not lower the firm's cost of debt. However, firms with ineffective advertising experience reduced bond market liquidity and a higher cost of debt. Without a real positive economic impact, advertising has little or no value for bond investors.

Suggested Citation

  • Nejadmalayeri, Ali & Mathur, Ike & Singh, Manohar, 2013. "Product market advertising and corporate bonds," Journal of Corporate Finance, Elsevier, vol. 19(C), pages 78-94.
    • Handle: RePEc:eee:corfin:v:19:y:2013:i:c:p:78-94
    DOI: 10.1016/j.jcorpfin.2012.10.002
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    Cited by:

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    2. Siamak Javadi & Ali Nejadmalayeri & Timothy L Krehbiel, 2018. "Do FOMC Actions Speak Loudly? Evidence from Corporate Bond Credit Spreads [Communication and monetary policy]," Review of Finance, European Finance Association, vol. 22(5), pages 1877-1909.
    3. Jiang, Fuxiu & Shen, Yanyan & Xia, Xiaoxue, 2024. "The spillover effect of advertising on the capital market: Evidence from financial constraints111 Fuxiu Jiang acknowledges the financial support from the China National Natural Science Foundation (Nos," Journal of Corporate Finance, Elsevier, vol. 84(C).
    4. Ali Nejadmalayeri & Subramanian Rama Iyer & Manohar Singh, 2017. "Is there an optimally diversified conglomerate? Gleaning answers from capital markets," Review of Quantitative Finance and Accounting, Springer, vol. 49(1), pages 117-158, July.
    5. Nejadmalayeri, Ali & Usman, Adam, 2022. "Real asset liquidity, cash holdings, and the cost of corporate debt," Global Finance Journal, Elsevier, vol. 53(C).
    6. Herrmann, Leonie & Stolper, Oscar A., 2017. "Investor familiarity and corporate debt financing conditions," Finance Research Letters, Elsevier, vol. 23(C), pages 263-268.
    7. Wang, Wenlong & Huang, Yuqin & Watson, John & Yang, Bowen, 2023. "The intra-regional spillover effects of bond defaults: Evidence from the Chinese corporate debt market," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).

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    More about this item

    Keywords

    Advertising; Visibility; Corporate bonds; Credit spreads; Liquidity;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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