Advertising intensity, investor recognition, and implied cost of capital

The main purpose of this paper is to test Merton's (J Finance 42(3):483-510, 1987) hypothesis that better investor recognition is correlated with lower expected returns. We measure investor recognition with the firms' advertising intensity and offer consistent evidence that higher advertising intensity is associated with lower implied cost of capital, as derived from Value Line target prices and dividend forecasts. Investor recognition plays an important role in attracting investors, improving liquidity, and ultimately reducing the cost of capital. The findings shed light on the capital market implications of advertising expenditures and complement the extant research on investor recognition. © 2011 Springer Science+Business Media, LLC.