Advertising and Portfolio Choice

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Abstract
This paper examines the role that advertising plays in the mutual fund industry and whether advertising affects investors' fund and portfolio choices. Content analysis shows that only a small fraction of fund advertising is directly informative about characteristics relevant for rational investors, such as fund fees. Higher quantities of advertising do not signal ex ante higher unobservable fund manager ability, because funds that advertise more are not associated with higher post-advertising excess returns. Fund advertising is shown to affect investors' choices, although it provides little information. These results do not seem to be driven by the endogeneity of advertising, and are robust to a series of robustness checks. Finally, advertising is found to steer people towards portfolios with higher fees and more risk, through higher exposure to equities, more active management, more "hot" sectors, and more home bias. This evidence has implications for welfare analysis, asset pricing and public policy, and may serve as a starting point for broader analysis of marketing and persuasion efforts in financial markets.