Stale Economic News, Media and the Stock Market

Abstract:     
This paper contributes to the debate around the role of newspaper coverage in financial markets. On the one hand, newspapers’ effect on stock prices may mean some investors trade on stale news reported in the newspapers, which may result in overreaction and market inefficiency. Alternatively, newspaper coverage of firm-specific news may improve efficiency. Due to the cost of obtaining information, investors do know of all securities. Therefore, newspaper stories about individual stocks improve information dissemination by reducing the cost of obtaining information, and increase the speed of stock price adjustments to firm-specific news. I address the debate by examining whether newspaper stories of economic news affect stock prices. Unlike with individual stocks, the cost of obtaining information about major economic releases prior to its coverage in the newspapers is relatively low. I find that stale economic news covered in the newspapers affects future stock returns and leads to return reversals. Additionally, stale economic news affects volatility and trading volume. I employ a classification of newspaper headlines from 389 papers.

Number of Pages in PDF File: 25

Keywords: Media, stale information, macroeconomic announcements, attention, efficient markets

JEL Classification: G12, G14, E44

working papers series