Television advertising plays a crucial role in shaping consumer behavior. It may also have a major influence on investment decisions, according to a novel study by HKUST’s Alminas Žaldokas and his colleague Jūra Liaukonytė from Cornell University. Their analysis of investor behavior revealed an increased interest in a company’s financial records immediately after an advert for that company aired on TV. Trade in both the advertised stock and its competitors increased the following day, establishing for the first time a causal relationship between TV advertising and investor actions.

Financial researchers have struggled with a key question for decades. “With thousands of stocks in the investing universe,” say the authors, “how do these investors decide which stocks to consider?” Along with factors such as financial outcomes, regulatory changes, and political influence, TV advertising may help to sway investment decisions. However, “discerning the causal link is challenging,” note the authors. For example, investment decisions may be influenced by confounding events that affect both ads and investor interests.

“We overcome these endogeneity concerns,” say the researchers, “by using a novel identification approach.” Using minute-by-minute ad data and looking at investor search behavior within a narrow time window after an ad, they were able to eliminate potentially confounding variables to isolate the impact of TV advertising on investor behavior.

In the USA, adverts are broadcast first in the Eastern Standard Timezone (EST) and repeated three hours later in the Pacific Standard Timezone (PST). The team analyzed EST investor interest and behavior immediately after an ad was broadcast, using PST investor behavior as a control. They collected data on searchers of financial information on 301 firms within 15 minutes of an advert’s being broadcast.

“On average,” the authors report, “a TV ad leads to an immediate 3% increase in SEC EDGAR queries about the advertiser.” The spike in searches was particularly noticeable during primetime hours, with some sectors more affected than others. “The effect rises to 11% in the case of ads of financial firms during primetime TV hours,” say the authors. The researchers also noted an 8% spike in Google searches soon after an ad had aired.

Although streaming services are rapidly overtaking TV, the influence of television advertising on investors should not be underestimated. “The hourly turnover of retail investors holding a specific company stock,” say the researchers, “is 24% higher when a TV ad for that company is aired in that hour.”

The “attention shock” generated by advertising encourages investors to dig deeper for information. “Advertising can be causally linked to financial information acquisition about an advertiser’s primary rival and its major supplier,” the authors tell us.

But does this interest translate into action? Yes, say the researchers. “Our findings suggest that 0.3% of the daily trading volume can be directly attributed to advertising.” The impact is greater for those with bigger budgets. “For the larger advertisers this figure rises to 0.6%,” report the authors. The ripple effect may spread to other companies, too. “The paper also documents the role of advertising in triggering searches and trading of companies other than the advertiser,” the researchers tell us.

This unique study establishes a causal link between TV advertising and investor intentions, providing that “financial information search and trading activity by retail investors can be predicted by TV advertising.”