ADVERTISING AND FIRM VISIBILITY: A CROSS SECTIONAL ANALYSIS

Abstract

Advertising primarily aims to increase product visibility and boost market share, but it has a spillover effect of increasing firm visibility in the capital markets. A firm with greater visibility stands to benefit from a lower cost of capital. To capitalize on the benefits of increased firm visibility, our study explored the relationships among advertising expense and firm visibility. We utilized a novel approach in measuring firm visibility, through the Google Search Volume Index (SVI). Data collected from Google Trends, S&P Compustat and Factiva were used. Empirical results show that an increased advertising expense is associated with an increased Google SVI. These results remain robust after controlling for alternative specifications of firm size, market sentiment and after the introduction of Google Finance. This provides evidence that advertising increases firm visibility in the capital markets. For the subsequent cross sectional study, we divided the data set into two clusters for the examined variables of percentage of institutional holdings, extent of media coverage and market capitalization. Empirical results show that firms with a lower percentage of institutional holders, higher media coverage and lower market capitalization have a stronger association between an increased advertising expense and increased Google SVI. These results remain robust after controlling for alternative specifications of firm size and market sentiment.