Tuesday, September 28, 2004

Are you ready for some football? Super Bowl and stock returns

Football in New Orleans! No, I am not talking the Saints, the Green Wave, or even LSU. But rather the paper by Fehle, Tsyplakov, and Zdorovtsov that will be presented at the FMA conference in New Orleans.

Short version: Super Bowl advertisers outperform the market by about a half a percentage point on Super Bowl Monday. This increase, which apparently is permanent, is concentrated in heavy advertisers and caused by buying activity by individual investors. This is consistent with a behavorial finance view of the world.

Longer version: Fehle, Tsyplakov, and Zdorovtsov study the stock price of firms that advertise during the Super Bowl. While overall there is no abnormal return, there is a positive abnormal return of slightly less than a half a percent for heavy advertisers.

The stock price jump does not appear to be driven by either increased expected sales or enhanced liquidity. To establish the mood and to tie this paper to behavioral finance, the authors begin by showing that previous research has shown that investor mood and attention, and not just financial variables, may influence stock prices. For example "Hirshleifer and Shumway (2003) document that the good mood associated with the weather...can still affect investor behavior."

Once this link is established, the authors state that this same type of link can exist with Super Bowl advertising. Again in their words:

There are good reasons to believe that mood and attention effects on investor
behavior may exist as a result of advertising. Extensive marketing literature
suggests that a person exposed to an affect-evoking advertisement about any
object, tends to change his or her attitude toward a more favorable
consideration of the object. Thus, advertising promoting the company image may
create a positive mood in the minds of investors and also potentially render
them more optimistic in their evaluation of a company’s fundamentals. [footnotes
The authors then set out to find this relationship. And sure enough they find it. For instance:

While there do not appear to be significant abnormal returns for the overall
sample on average, abnormal returns are greater for firms readily identifiable
from the ad contents and increase in the number of ads employed....For
recognizable companies with the number of ads greater than the sample mean of
two, the event is followed by an average abnormal Monday return of 45 basis
points. Interestingly, the effect appears to be non-transitory in nature as the
20-day post-event cumulative abnormal returns for this subset average 2%.
What might be more important is the finding that this increase in price is caused by buying concentrated in small buyers.

"Our hypothesis is that small, less sophisticated investors are most susceptible
to such effects, and thus tend to buy stock of companies recognized in Super
Bowl ads. This hypothesis is in line with work by Barber and Odean (2002)
showing that small individual investors are more prone to be net buyers of
attention-grabbing stocks....Consistent with our hypothesis, we find that small
trades for recognized companies exhibit significant abnormal net buying

This is interpreted as supportive of the view that investors, in particular small investors, are making decisions based on the ad and not on the underlying economics of the firm. This is understood to be consistent with a behavioral finance view of the world.

The authors correctly note that there are alternative explanations to these findings. For instance:

  1. The ads are of higher than expected quality and high quality ads lead to more sales, and hence a higher stock price.
  2. The ads reduce information costs and therefore lead to a more diffused shareholder base and higher liquidity.

These explanations are considered and then refuted. The easiest refutation is that if there is a response to information costs and liquidity storoes, then the stock price should move on the announcement of the ads, and not on the Monday following the game.

The authors comment on this:

Given that Super Bowl ads are pre-announced, we expect that any positive or
negative effect of the ad on sales is priced in before the Super Bowl. The only
unexpected component of the sales effect could be due to the quality of the ad.
However, there is no reason to believe that investors’ expectations of ad
quality should be biased and therefore we do not expect abnormal returns in the
cross-section after ad quality is revealed.
What may be most interesting is the suggestion that the advertising firms know this relation exists and are running the ad as a means of raising stock prices. "...the decision to run a commercial can be viewed as a costly, endogenous and possibly strategic choice by firms that may aim to exploit investors’ misreaction. The potential for such strategic advertising suggests a possible link between behavioral finance and traditional corporate finance topics."

My view: “Getting noticed” is a factor in pricing. And yes one aspect of advertising is to get noticed. However, it is not a major determinant in asset pricing (the abnormal returns were less than ½ a percentage point). Given transaction costs (both information costs and trading costs), it is probably not worth it for investors to readjust their portfolios prior to when the advertisement actually runs.

Additionally, this “getting noticed” is, as the authors suggest, arguably more important for smaller firms. This size story would also be consistent with the finding that the price jump is driven by small trades since larger trades would gravitate to larger firms.

That said, I am ALMOST convinced. This ALMOST is quite a concession from a market efficiency adherent and testament of a job well done by the authors. When I first read the abstract, I defensively thought of several explanations other than the behavioral finance story. But the authors addressed these arguments. So I am forced to admit that the behavioral finance angle is compelling.

Very interesting paper! I am sure the session in New Orleans will be well-attended, so get there early!

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