Massive Advertising Expenses Changes, Risk, and Implications for Stock Returns

This research paper offers a new analysis of the impact of U.S. firms’ expenses on advertising on the cross-section of stock returns. Rather than exploring the level of advertising expenses, this study concentrates on their logarithmic percentage change to emphasize only major changes. Massive negative changes present a risk and therefore account for higher stock returns. This impact is economically and statistically significant. Moreover, this impact is validated in various robustness tests. The analysis is performed on 231,323 U.S. firm-year observations. Researchers and practitioners can benefit from the analysis. Advertising management and advertisers should adjust advertising budgets gradually because massive declines are adverse for risk and cost of equity.