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News or Noise? The Stock Market Reaction to Different Types of Company-Specific News Events

66 Pages Posted: 5 Jan 2011 Last revised: 20 Jan 2011

Timm O. Sprenger

Technische Universität München (TUM) - School of Management

Isabell M. Welpe

Technische Universität München (TUM) - School of Management

Date Written: January 4, 2011

Abstract

It is generally accepted that news, often defined as news stories in a professionally edited newspaper, moves stock prices. By exploring data from an online stock forum our study presents a novel approach to identify stock-related news events from an investor perspective as an alternative to traditional media sources. We investigate the market impact of different types of company-specific news events (e.g., news related to corporate governance, operations, or legal issues) on S&P 500 stock prices in order to discern genuine news that moves the market from insignificant noise without market reaction. We leverage computational linguistics methods to distinguish between good and bad news by controlling for the sentiment (i.e. the positive vs. negative tone) of different news stories. Our results show that the absolute value of cumulative returns prior to a news event are more pronounced for positive news than they are for negative news, suggesting more widespread information leakage before good news. We find that the market reaction differs substantially across various types of news events. In addition, a cross-industry comparison indicates that industry classification may partially explain the market reaction to the same event type.

Keywords: Twitter, Microblogging, Text Classification, Stock Market, News, Event Study, News Sentiment

JEL Classification: G14

Suggested Citation

Sprenger, Timm O. and Welpe, Isabell M., News or Noise? The Stock Market Reaction to Different Types of Company-Specific News Events (January 4, 2011). Available at SSRN: https://ssrn.com/abstract=1734632 or http://dx.doi.org/10.2139/ssrn.1734632

Timm O. Sprenger (Contact Author)

Technische Universität München (TUM) - School of Management ( email )

Arcisstrasse 21
Munich, 80333
Germany
+49-(0)89-289-24800 (Phone)
+49-(0)89-289-24805 (Fax)

HOME PAGE: http://www.strategie.wi.tum.de

Isabell M. Welpe

Technische Universität München (TUM) - School of Management ( email )

Leopoldstrasse 139
Munich, 80804
Germany
++49/89/289-24800 (Phone)
++49/89/289-24805 (Fax)

HOME PAGE: http://www.strategie.wi.tum.de

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