The Economic Value of Firm-Specific News Sentiment

Abstract

This paper quantifies the impact of stock-specific news sentiment on future financial returns. Predictive regressions yield significant t-statistics for 7% at most of our sample of more than one thousand large stocks listed in the US. While a few assets do run through pockets of predictability, the evidence suggests that the feedback effect is stronger in the reverse direction: returns are more likely to drive future sentiment than the other way around. In addition, cross-sectional portfolios sorts built on news sentiment do not exhibit distinct profitabilities, which suggests the absence of a pricing factor linked to sentiment. All in all, our significantly insignificant results point towards a rather limited value of stock level news-sentiment.

Keywords: News Sentiment, Predictability, p-hacking, Portfolio Sorts, Market Timing

JEL Classification: G12, G17