Time Variation in the News-Returns Relationship

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

Glasserman, Paul and Li, Fulin and Mamaysky, Harry, Time Variation in the News-Returns Relationship (January 10, 2022). Columbia Business School Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=3420981 or http://dx.doi.org/10.2139/ssrn.3420981