When Can the Market Identify Old News?

Abstract

What drives the persistent puzzle of market reactions to old news? Motivated by theories of correlational neglect, we conduct an experiment on finance professionals and show that even sophisticated investors have difficulty identifying old information that recombines content from multiple previous news articles. To evaluate the market implications of this mechanism, we exploit a unique dataset of 17 million news articles from the Bloomberg terminal. Recombination of old information prompts larger price moves and subsequent reversals than direct reprints of old news. Furthermore, while overall reactions to old information have declined over time, differential reactions to recombinations have risen.

Keywords: news, recombination, information processing, correlational neglect, inattention, reversal

JEL Classification: G12, G14, G41, D83, C91