Unusual News Flow and the Cross-Section of Stock Returns

56 Pages Posted: 12 Aug 2016 Last revised: 15 Nov 2016

See all articles by Turan G. Bali

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

Andriy Bodnaruk

University of Illinois at Chicago

Anna Scherbina

Brandeis University

Yi Tang

Fordham University - Gabelli School of Business

Date Written: November 14, 2016

Abstract

We document that stocks that experience sudden increases in idiosyncratic volatility underperform otherwise similar stocks in the future, and we propose that this phenomenon can be explained by the Miller (1977) conjecture. We show that volatility shocks can be traced to the unusual firm-level news flow, which temporarily increases the level of investor disagreement about the firm value. At the same time, volatility shocks pose a barrier to short selling, preventing pessimistic investors from expressing their views. In the presence of divergent opinions and short selling constraints, prices end up initially reflecting optimistic views but adjust down in the future as investors' opinions converge.

Keywords: Unusual News Flow, Volatility Shocks, Short Sale Constraints, Market Efficiency

JEL Classification: G10, G12, G14

Suggested Citation

Bali, Turan G. and Bodnaruk, Andriy and Scherbina, Anna D. and Tang, Yi, Unusual News Flow and the Cross-Section of Stock Returns (November 14, 2016). Georgetown McDonough School of Business Research Paper No. 2820320; Gabelli School of Business, Fordham University Research Paper No. 2820320. Available at SSRN: https://ssrn.com/abstract=2820320 or http://dx.doi.org/10.2139/ssrn.2820320

Turan G. Bali (Contact Author)

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: http://faculty.msb.edu/tgb27/

Andriy Bodnaruk

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60607
United States

Anna D. Scherbina

Brandeis University ( email )

415 South Street
Waltham, MA 02453
United States

HOME PAGE: http://sites.google.com/a/brandeis.edu/anna-scherbina/

Yi Tang

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
New York, NY 10023
United States

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