Does advertising really work?. The direct stimulating and attention-grabbing effects of advertising on investor behavior

• DOI: https://doi.org/10.1108/IJAIM-10-2019-0119
• Pages: 497-515
• Date: 16 March 2020
• Published date: 16 March 2020
• Author: Keke Wu,Yan Yu,Dayong Dong
• Subject Matter: Accounting methods/systems,Accounting & Finance

Does advertising really work?

The direct stimulating and attention-grabbing

effects of advertising on investor behavior

Keke Wu,Yan Yu and Dayong Dong

Department of Finance and Accounting, School of Economics and Management,

Southwest Jiaotong University, Chengdu, China

Abstract

Purpose –This paperaims to examine the direct and indirecteffects of advertising on investorbehavior.

Design/methodology/approach –The authors usea novel and direct measure of investor attention:the

number of investorswhose watch lists has the stock.

Findings –The authors f‌ind that beyond its directeffect through information dissemination, advertising

has an indirecteffect with regard to grabbing investor attentionand the trading response. The authors further

f‌ind that an increase in attention induces a positive inf‌luence on the impact of advertising on investor

behavior.

Originality/value –First, it complements studiesof home bias, in which investors are more likely to buy

familiar stocks. Second, it also complements the literature on advertising and investor attention and on

attention and capital markets. Third, with a new and unambiguous measure of investor attention. Fourth,

combining the direct and indirect aspects, this study presents a detailed description of the f‌inancial market

effect of advertising.

Keywords Advertising, Investor behaviour, Investor attention, Direct effects, Indirect effects

Paper type Research paper

1. Introduction

In this paper, we investigate whether advertising can affect investors’choices in Chinese

stock market. Specif‌ically,we examine three problems:

(1) Does advertising stimulate investors to invest in f‌irms’stocks?

(2) Does the effects of advertising on investors’behavior through investor attention?

(3) We further investigate whether investor attention affects advertising and trading

reaction.

In particular, we study whether advertising has a positive attention-grabbing effect on the

investment decision beyond thedirect investment effect. Controlling for the potential effect,

our results indicate that advertisinghas both a direct investment effect and an indirect effect

of investing by attracting investors’attention. The former is called the advertising direct

investment effect and the latter is called the advertising attention-grabbing effect. We

further f‌ind that investor attention has a promotion effect between advertising and

investors’buying activity; it enhancesthe impact of advertising on investment. Our results

are mostly consistent with the notionin Grullon et al. (2004) that product market advertising

has a spillover effect on f‌irms’ownership structure and with notion in Lou (2014) that

advertising mayattract investor attention, which, in turn, increasesstock returns.

Following Grullon et al. (2004), we adopt shareholders instead of returns or the price to

show investors’decision-making. We mainly use individual shareholders to measure

Ef‌fects of

advertising

497

Received16 October 2019

Revised28 December 2019

Accepted6 January 2020

InternationalJournal of

Accounting& Information

Management

Vol.28 No. 3, 2020

pp. 497-515

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-10-2019-0119

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1834-7649.htm

investor behavior as there are far more individual investors than institutional investors in

the Chinese stock market. This data comes from the China Stock Market and Accounting

Research (CSMAR) database. In addition, we adopt a novel and direct measure of the

number of investors whose watch list has the stock, hereafter called the number of

community users, tomeasure investor attention. This measure is based on investorbehavior

as well as the Google and Baidu search indexes. If a stock is on your watch list, then it

undoubtedly grabbedyour attention before.

This paper relates to two strandsof research. One concerns the impacts of advertising on

capital markets. There has been a considerable amount of research documenting that

advertising affects asset pricing in a familiar or strong brand preference (French and

Poterba, 1991;Kadlec and McConnell, 1994;Foerster and Karolyi, 1999;Huberman, 2001;

Martínez et al., 2009;Larkin, 2013). The other branch concerns the relationship between

advertising and investor attention. Product market advertising is designed to attract

consumers’attention, and investors can take notice as well (West et al., 2008;Frieder and

Subrahmanyam, 2005;Fehle et al.,2005;Chemmanur and Yan, 2010;Lou, 2014;Liao et al.,

2016). In addition, a recent body of research considers that product advertising enhances

investors’subjective evaluations based on rational expectations theory. Advertising

strengthens investor conf‌idence and has a positive, long-term impact on f‌irms’value (Joshi

and Hanssens, 2010;Asparaand Chakravarti, 2015).

Our paper contributes to research in the followingaspects. First, it complements studies

of home bias, in which investors are more likely to buy familiar stocks. Second, it also

complements the literature on advertising and capital markets. Third, with a new and

unambiguous measure of investorattention, it provides more direct empirical evidence that

advertising has a signif‌icantimpact on investor attention and then induces a positive impact

on investor behavior, the mediatingeffect of investor attention. Fourth, combining the direct

and indirect aspects, we present a detailed description to answer “how-and-why”question

about the f‌inancial marketeffect of advertising.

The rest of this paper is organized as follows. Section2 discusses the main issues, related

literature and hypotheses. Section3 discusses our data collection and presentsour samples

description. Section 4 provides univariate and multivariate research results, and Section 5

presents the robustnesscheck. Finally, Section 6 concludes the paper.

2. Hypothesis development

We examine whether there isan increasingchange in the number of individual shareholders

with higher advertising expenditures. Many prior studies suggest that investors do indeed

bias their portfolio investment decisions based on what they “know.”Huberman (2001) was

the f‌irst to provide compelling evidence that people have a preference for the familiar. He

suggests that “People root for the home team, and feelcomfortable investing their money in

a business that is visible to them [...]”. In addition, investors are in favor of investing in

their own company’s stock (Benartzi, 2001), local companies (Coval and Moskowitz, 1999;

Grinblatt and Keloharju, 2001), domestic stocks (French and Poterba, 1991;Kilka and

Weber, 2000), stocks listed on a famous trading market, i.e. the New York Stock Exchange

(Kadlec and McConnell, 1994) and professionallyclose stocks (Døskeland and Hvide, 2011).

Coval and Moskowitz (1999) show that institutional investors are also characterized by

home bias; they suggest that theportfolios of US mutual fund managers show a strong bias

toward local stocks (Brown et al.,2011;Atanasova and Chemla, 2013).

Studies further demonstratethat investors show a propensity for strong brand names, as

well-recognized brands send a message about the companies to investors (Kent and Allen,

1994;Frieder and Subrahmanyam, 2005;Martínez et al., 2009;Larkin, 2013). Out of

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