How advertising impacts Wall Street

By Alexandra Richter

BUFFALO, N.Y. — When companies increase their advertising, financial analysts can make more precise and reliable predictions about their future performance, according to new research from the University at Buffalo School of Management.

Forthcoming in the Journal of Accounting and Public Policy, the study underscores how product advertising — traditionally viewed as a tool for influencing consumer behavior — can serve a dual purpose: supporting product sales and providing valuable insights to help analysts make more accurate forecasts and, in turn, influencing investor decisions.

“Advertising isn’t just about persuading customers — it can also be a powerful signal to investors about a company’s future,” says the study’s co-author, Inho Suk, associate professor of accounting and law in the UB School of Management. “This impact is even more pronounced for firms reviewed by industry experts, those with unpredictable performance, or those introducing new trademarks.”

To assess whether advertising causes analysts to make better predictions, the researchers examined data from U.S. companies between 2001 and 2015 using advanced statistical methods. They also used a real-world policy shift to their advantage. In 1997, the FDA relaxed regulations on pharmaceutical advertising, allowing direct-to-consumer ads for prescription drugs. This enabled the researchers to compare how analysts’ forecasts evolved for pharmaceutical companies compared to similar companies in industries unaffected by the regulations.

By pinpointing advertising’s direct influence on analyst predictions, the study indicates that product advertising can provide useful information to investors and also can affect stock prices.

“Our findings deepen our understanding of advertising’s role in capital markets,” says Suk. “It can be a strategic tool for improving how the market determines a company’s value.”

Suk collaborated on the study with Heeick Choi, PhD, associate professor of business, Sungkyunkwan University SKK Business School; SeungWon Lee, PhD, assistant professor of accounting, Pennsylvania State University Harrisburg School of Business Administration; and Hao Zhang, PhD, professor of finance and accounting, Rochester Institute of Technology Saunders College of Business.