Deceptive advertising and abnormal stock returns: An event study analysis

This study examined the impact of deceptive advertising on the abnormal stock returns of firms. Using an event study analysis with 101 cases from the FTC database over the period 1987–2005, the FTC rulings on deceptive advertising were found to have the negative effects on the abnormal stock returns of firms.

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,...

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