Product market advertising and stock price crash risk

Abstract In this paper, we investigate whether and how product market advertising affects future stock price crash risk. We document robust evidence of a positive relation between intensive advertising and crash risk for a sample of Chinese non-financial firms with 12,489 firm-year observations. We find that a one-standard-deviation increase in product market advertising can lead to a 7.43–8.40% increase in future crash risk. We also find that the positive relation between product market advertising and crash risk is more pronounced for firms with a poorer information environment. Further analysis shows that intensive product market advertising affects future crash risk by diverting investor attention from bad news and fostering optimistic sentiments or bubbles.