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The capital market spillover effect of product market advertising: Evidence from stock price synchronicity |
Yajie Chen1, Qinlin Zhong2(), Fuxiu Jiang3 |
1. Business School, Renmin University of China, Beijing 100872, China 2. Business School, Renmin University of China, Beijing 100872, China 3. Business School, Renmin University of China, Beijing 100872, China |
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Abstract We analyze whether product market advertising has a spillover effect on stock price synchronicity by transmitting firm-specific information to the capital market and attracting more investor attention. Using a sample of Chinese listed firms from 2009 to 2017, we find that firms with greater advertising expenditures have lower stock price synchronicity. The results are robust after we address endogeneity concerns. In accord with our hypothesis that product market advertising increases the amount of firm-level information capitalized into stock prices through the information channel, we find that the impact of advertising on synchronicity is more pronounced for firms with a higher degree of information asymmetry and firms in the consumer-product industry. Further tests show that product market advertising enhances the ability of current period returns to reflect future earnings, and thus rules out that the negative relationship between advertising and synchronicity is driven by noise trading. Our results imply that product market advertising plays an informative role and improves information efficiency in a capital market.
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Keywords
Advertising
Stock price synchronicity
Spillover effect
Product market
Capital market
Investor attention
Information asymmetry
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Issue Date: 17 July 2020
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