Does Recognition Explain the Media-Coverage Discount? Contrary Evidence from Hedge Funds

Abstract

Previous studies document a media-coverage discount in the cross-section of stock returns, which is attributed to Merton's investor-recognition hypothesis. This paper offers a natural experiment for this explanation by focusing on the media coverage of funds, not their underlying positions. Funds are not directly traded by investors; therefore one would not expect an investor-recognition discount in their cross-section. Yet, we document that hedge funds with media coverage underperform no-coverage funds by 3.5% annually over 1999-2008. Although media coverage affects fund flow, underperformance is not channeled through investor fund flow. The effect is more pronounced in funds at the top and bottom of past performance as well as small funds. Since the paper finds that the media-coverage discount in the cross-section of funds is similar to that found in the cross-section of stocks, it follows that Merton's hypothesis need not be the only explanation for the media-coverage discount.

Keywords: Information, Media coverage, Hedge funds, Fund flows, Asset pricing

JEL Classification: G12, G14