Deceptive advertising and abnormal stock returns: An event study analysis

Jaeseok Jeong

Kung Hee University

Chan Yun Yoo

University of Kentucky

Introduction

It stands to reason that rational, ethical companies will avoid engaging in deceptive advertising. Deceptive advertising would expose the company to the risk of Federal Trade Commission (FTC) charges and the resultant negative publicity, wasted ad expenses, legal fees, restrictions on future ads, and degradation of company and brand image. Deceptive ads, whether created intentionally or unintentionally, may lead to an undeserved improvement in consumers’ impression of the product.

When the FTC prosecutes a company for deceptive advertising, some publicity is generated at the time charges are filed and at resolution of case, whether through settlement or litigation. This negative publicity may harm the company’s image. When successfully prosecuted by the FTC, at resolution of the case, the order typically calls for some types of remedy. These can include a traditional cease-and-desist order, monetary redress to consumers, punitive fines in cases where previous orders have been violated, or corrective ads to reverse consumers’ false beliefs. Each of these remedies will cost the company in terms of wasted ad expenditures, financial loss or legal fees.