Stock Price Informativeness and the Sensitivity of Advertising Expenditures to Stock Price

ABSTRACT This study explores whether managers learn from stock prices when deciding on advertising expenditures. Analysing U.S. firms from 1994 to 2021, we find that higher stock price informativeness increases firms' advertising expenditure‐to‐price sensitivity. The results are validated using DiD estimation based on Regulation SHO and IV analyses. No correlation is found between stock price informativeness and advertising sensitivity to non‐price investment opportunities. Better price informativeness also strengthens the impact of advertising on sales. Finally, the positive effect of price informativeness on advertising expenditure‐to‐price sensitivity weakens in larger, older firms and strengthens in firms with higher product similarity and industry concentration.