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Do stock prices undervalue investments in advertising?

Author

Listed:
  • Yun Kyung Oh

    (Dongduk Women’s University)

  • Huseyin Gulen

    (Purdue University)

  • Jung-Min Kim

    (University of Seoul)

  • William T. Robinson

    (Purdue University)

Abstract

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.

Suggested Citation

  • Yun Kyung Oh & Huseyin Gulen & Jung-Min Kim & William T. Robinson, 2016. "Do stock prices undervalue investments in advertising?," Marketing Letters, Springer, vol. 27(4), pages 611-626, December.
    • Handle: RePEc:kap:mktlet:v:27:y:2016:i:4:d:10.1007_s11002-016-9411-4
    DOI: 10.1007/s11002-016-9411-4
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    References listed on IDEAS

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    Cited by:

    1. Mahabubur Rahman & M. Ángeles Rodríguez-Serrano & Mary Lambkin, 2019. "Advertising efficiency and profitability: Evidence from the pharmaceutical industry," Post-Print hal-02096913, HAL.

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