Time Variation in the News-Returns Relationship
57 Pages Posted: 17 Jul 2019 Last revised: 15 Mar 2022
Date Written: January 10, 2022
The well-documented underreaction of stock prices to news exhibits substantial time variation. Higher risk-bearing capacity of financial intermediaries, lower passive ownership of stocks, and more informative news increase price responses to contemporaneous news; surprisingly, they also increase price responses to lagged news (underreaction). Our findings are not driven by short-sale constraints, serial correlation in news flow, or improved information processing capacity. We discuss possible mechanisms based on investor behavior and strategic order-splitting by institutions. A simple model with limited attention and three investor types – institutional, non-institutional, passive – predicts the varying response to news we observe.
Keywords: information choice; asset pricing; price efficiency; attention
JEL Classification: G14, G20, D83
Suggested Citation: Suggested Citation