Market and Individual Investors Reactions to Corporate News in the Media

Abstract

In this paper we present results from an event study based on a unique data set of corporate news in the media. The data is provided by Media Tenor, a research institute which collects and rates all corporate news from the most important German daily newspapers and TV news. Our analysis is based on roughly 300,000 corporate news on 125 large- and medium-sized companies in 5 large daily newspapers and 7 TV news shows from Germany between July 1998 and October 2006. Since analysts rate the news, we have an exogenous measure whether news are good or bad news for a company. Based on this data we can show that the incorporation of information in prices is fairly fast. The main price reaction occurs on the day of the arrival of the new information. This price jump is especially large if the news coverage in the media is accompanied by ad hoc announcements made by the corporation itself. While there is only a very short-term post-event drift after good news, prices tend to drift for several days after bad news. The post-event trading volume is significantly higher than before the news for several days for good as well as bad news. To provide a test of the model of Hong and Stein (1999) we define several proxies for the speed of the information diffusion through different investor groups. We find that for smaller companies with lower abnormal media coverage the information diffusion is indeed slower, as predicted by theory. We further combine the media coverage data with individual investors transaction data in stocks and bank-issued warrants from a large German online broker. Our results indicate that individual investors, especially stock investors, as compared to warrant investors, react slower to new information as the market does. A tendency to react to bad news by buying put warrants, because selling stocks short was impossible for private investors during our sample period, could not be observed.

Keywords: information diffusion, corporate news, media coverage, post-event price drift, individual investors, bank-issued warrants

JEL Classification: G14