Previous studies (e.g., by Sam Peltzman) demonstrate the powerful share-value effects of Federal Trade Commission (FTC) actions against firms whose advertising the FTC claims violate the law. Curiously, however, when the FTC announces an investigation but simultaneous settlement of the case with the advertiser, no adverse impact results, an empirical finding thus far unexplained. This article uses a recent FTC action, in which the accused advertiser suffered no adverse equity impact, to explain that result. Many advertising messages challenged by the FTC are not material to consumers. If not - and especially when, as in the case discussed here, the advertiser had much earlier discontinued the advertising challenged - the advertiser predictably would not suffer. Econometric evidence supports the findings of no adverse impact, and of lack of materiality in the messages the FTC challenged.
Date of this Version
Richard S. Higgins and Fred S. McChesney, "Why Wonder Bread Lost No Dough: Materiality, Settlements and the FTC's Ad Substantiation Program" (August 2003). Law and Economics Papers. Working Paper 31.