Does Public Financial News Resolve Asymmetric Information?
52 Pages Posted: 21 Nov 2008 Last revised: 30 Aug 2011
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Does Public Financial News Resolve Asymmetric Information?
Does Public Financial News Resolve Asymmetric Information?
Date Written: April 1, 2010
Abstract
I use uniquely comprehensive data on financial news events to test four predictions from an asymmetric information model of a firm's stock price. Certain investors trade on information before it becomes public; then, public news levels the playing field for other investors, increasing their willingness to accommodate a persistent liquidity shock. Empirically, I measure public information using firms' stock returns on news days in the Dow Jones archive. I find four patterns in postnews returns and trading volume that are consistent with the asymmetric information model's predictions. Some evidence is, moreover, inconsistent with alternative theories in which traders interpret news differently for rational or behavioral reasons.
Keywords: media coverage, news, asymmetric information, liquidity, return momentum, return reversal
JEL Classification: G14, D82
Suggested Citation: Suggested Citation
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