Timing of advertising and the MAX effect

Bali et al. (2011) document that stocks with high maximum daily return (MAX) underperform compared to stocks with low maximum daily return, referred as the “MAX effect”. This paper is based on the argument of behavioral theory to investigate the influence of advertising on the MAX effect. Using investor sentiment index to reflect investors’ optimism grows, our evidence shows that the high advertising portfolio has significant MAX effect, and the predictive power of sentiment on MAX effect in the high advertising portfolio is more pronounced than in the low advertising portfolio. Findings suggest that firm managers spreading information by increasing advertising during high levels of sentiment will increase investors’ overconfidence. This increased overconfidence generates higher stock returns and thus attracts investors with a preference for risk-taking. Consequently, an increased demand for lottery-type stocks increases the MAX effect.