Do expenses on advertisement impact a companys stock price?

Advertising greatly impacts the revenue and profit of a company, which in turn, put strong influence on its stock market prices. Although these are indirect effects of advertising on stock prices, it can also have a direct effect on the valuation. Several studies have tried to find a correlation between advertising and stock price changes. Advertising creates a brand value, which can boost stock market price movements. We have analyzed one of the leading consumer retail companies in India. Its stock price has increased from Rs. 433 in November 2016 to Rs. 1,707 in November 2019, at a CAGR of 58 per cent. During this period, the sales have grown by only 7 per cent CAGR, whereas, EPS rose by 16 per cent. If fundamentals were driving the stock price, the stock should have given returns in line with the rise in the sales, profits, and other financial parameters. However, the stock has given excess returns compared to the financial parameters of sales and EPS. One reason for this excess return may be the aggressive increment in the advertisement expenses. The company has significantly increased advert spend between 2016 and 2019. In 2016 its advert spend was Rs. 23 crores, which touched Rs. 66 crores in 2019 at a CAGR of 42 per cent. Advertisement has a positive effect on investor psyche, which makes it a compelling case for attributing the excess returns to the advert spend increase.