Stock news like Superbowl ads?

We’re used to thinking that a company’s commercial success – sales, margins and of course profits – determines its performance in the stock market. What if it’s also the other way around? Could it be that stock market news affects the company’s customers and its performance in the product market?

The idea is not new. Some 25 years ago, an influential paper demonstrated that stock prices can indeed affect the cash flows they are supposed to reflect. This may not sound like a great surprise, as stock prices indirectly express the cost of equity – like higher stock prices making it easier to issue new equity to finance more investments.

There is, however, more to this story. Non-investor stakeholders, like customers, employees, and suppliers, may also be affected. Would you want to buy a car from a company whose stock price indicates a real risk of bankruptcy? (Or did you happen to buy an electric vehicle after reading about the company’s soaring stock price?)

More recent research adds flavour to the story. A paper published last year posits that financial reporting influences consumer behaviour by drawing their attention. In fact, using GPS data, they “document upticks in foot-traffic to firms’ commercial locations immediately following their earnings announcements.” If this has gone under the radar in the finance community, it may be because it appeared in an accounting journal.

Another contribution to the accounting literature demonstrates that consumer attention is heightened following earnings announcements, and it’s not just statistically measurable – it has a magnitude of about 1/6 of a Superbowl ad (without the heavy price tag). In contrast, consumers couldn’t care less about dividend announcements.

Furthermore, it seems consumers change their perception of the company upon receiving earnings news. This is particularly pronounced for companies selling high-value goods, network goods (when your adoption is useful to me) and when they have less prior knowledge about the company’s products or services. The title of the paper, fittingly, is “The brand value of earnings”.

One particular kind of stock market announcement is the stock split, typically done to reduce the nominal value of a single share. It may affect more than stock market liquidity: According to a draft circulated on the SSRN network, “sales grow significantly after the stock split” (!), especially for smaller companies with lower institutional ownership.

While stock splits are really only about slicing the company pizza, it’s been known for decades that they are associated with abnormal excess returns. This has typically been attributed to some informational signalling, like conveying confidence in the future. According to this paper, however, it may generate a lot of marketing bang for practically no buck, as such events “are flagged by brokerage platforms, covered in financial news outlets, and often go viral on social media.”

From a financial perspective, stock splits are trivial events, technically irrelevant. In a truly efficient market, they are non-events. In practice, they’re not. Much like rational investors and market efficiency.