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Materiality, settlements and the FTC'S Ad substantiation program: Why wonder bread Lost No Dough
Author(s) -
Higgins Richard S.,
McChesney Fred S.
Publication year - 2011
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.1501
Subject(s) - complaint , commission , materiality (auditing) , settlement (finance) , advertising , economics , wonder , law and economics , business , political science , law , psychology , social psychology , art , finance , payment , aesthetics
Previous studies (e.g. by Peltzman and Mathios‐Plummer) reveal powerful share‐value effects of Federal Trade Commission (FTC) actions against firms for their advertising. Curiously, however, Mathios‐Plummer finds that 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 adds to the literature in two ways. First, we analyze statistically more recent cases, and show that the Mathios‐Plummer results—no impact when the FTC issues simultaneously a complaint and settlement—have been robust over time. More important, the article uses a recent FTC action, in which the accused advertiser suffered no adverse equity impact, to explain lack of impact when complaint and settlement are announced simultaneously. The article focuses empirically on the issue of materiality. 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 strongly indicates that the messages the FTC challenged were immaterial to consumers. Copyright © 2010 John Wiley & Sons, Ltd.