Moderation Effect of Investor and Manager Heterogeneous Beliefs on the Relationship of Advertising and Firm Value

Abstract

Advertising will enhance brand capability and company reputation. Many researches have shown that advertising affects company’s sales performance. However, how advertising expenditure influences corporate financial market performance needs further investigations. The aim of this paper is to examine the relationship between advertising and firm value with the consideration of heterogeneous beliefs (HB) theoretically and empirically. Compared to some other HB researches, both investor heterogeneous beliefs (IHB) and investor-manager heterogeneous beliefs (IMHB) have been tested for the moderation effects in this study. Panel models are used, and data of manufactory industry in China’s stock markets was collected for empirical econometric analysis. The results show that advertising has a significant and positive effect on firm value. In addition, HB have a negative moderation effect on the relationship of advertising and firm value. These findings indicate that advertising is rather an investment than expenses. Firm value can be improved by devoting advertising expenses as well as reducing the IHB and IMHB.