Amid the turbulence in stock markets, retail investors continue to look for investment ideas. With thousands of publicly-traded stocks available, many retail investors often resort to their recent personal experiences when deciding on which stocks to buy or sell. Maybe a surge in video conferencing or home deliveries will prompt them to invest in companies involved in those businesses. They could even be inspired by ads they see on TV.
In a recent paper, we find a predictable, recurring, and robust pattern between investor exposure to television commercials and subsequent retail stock trading. We find that, within 15 minutes of seeing an ad for a firm’s product or service, investors begin searching for financial information on that firm’s stock. This surge of attention leads to a higher trading volume of the advertiser’s stock the following day – and contributes to a temporary rise in the stock price of that firm. Indeed, our recent research shows that the effects of advertising on investor behavior and stock prices are more far reaching than previously believed.
We documented these effects by comparing responses among households that were and were not exposed to the ads. We took advantage of the three-hour lag between the East and West Coast for airing the same commercials during the same shows on national television channels. Our analysis used the IP addresses of investors, and minute-by-minute television advertising data involving some 326,000 ads, 301 firms, and $20 billion in ad spending. These extensive data made it possible for us to examine the real-time effects of TV advertising on investor searches for online financial information and subsequent trading activity.
Within 15 minutes, an average TV ad spurred an immediate 3 percent increase in queries of the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system of the U.S. Securities and Exchange Commission. Google searches for related financial information immediately climbed by 8 percent.
We found that each dollar spent on advertising translated to roughly 40 cents of additional trading volume in the advertiser’s stock. The effects were most pronounced for trades initiated by retail investors. Overnight stock returns were positive – though they partially reversed during subsequent trading days.
The related advertising effects weren’t confined to the company airing the ad. Investors also sought information on the advertising firm’s closest rivals and their suppliers. These ad-driven information searches on the closest rivals translated to higher trading volume of their stocks, too. We believe our work is the first to document a causal effect of a given firm’s ads on investor interest in its closest rivals and major suppliers.
The nature and timing of the ads made a difference. For example, commercials aired during primetime hours and involving the financial sector sparked the strongest investor response. Ads for pharmaceutical products and consumer staples also generated more interest. Details mattered. Products with names that matched or shared similarities with the name of the company itself spurred greater reaction. The most influential commercials were longer, aired first among several during ad breaks, and surfaced in new, rather than long-running, campaigns.
The findings strongly suggest that advertising intended for consumers of certain products or services has an effect on financial markets. What explains this phenomenon? Though we can only speculate, we know that throughout history, investors have sought and acted on investing tips from any source. Now we have shown that TV advertising is one such source.
This post comes to us from Jura Liaukonyte, the Dake Family Associate Professor at Dyson School in the SC Johnson College of Business at Cornell University, and Alminas Zaldokas, an assistant professor of finance at the Hong Kong University of Science and Technology. It is based on their recent paper, “Background Noise? TV Advertising Affects Real Time Investor Behavior,” available here.