Biased News and Irrational Investors: Evidence from Biased Beliefs about Uncertainty and Information Acquisition

85 Pages Posted: 30 Sep 2020 Last revised: 19 Jun 2021

See all articles by Jiatao Liu

Jiatao Liu

Xi’an Jiaotong-Liverpool University

Date Written: August 1, 2020

Abstract

Investors who use biased information from news media subsequently tend to make irrational decisions about acquiring firm-specific information compared to rational expectations. This model of information acquisition yields testable predictions that are verified by using a novel dataset. First, when sentiment in news articles, as a proxy for biased public information, is more optimistic, investors tend to acquire less earnings-relevant information before the earnings announcement and vice versa. Second, the return predictability from firm-specific news sentiment confirms that it contributes to variations in asset information risk due, in a biased belief equilibrium, to the proportion of informed investors deviating from rational expectations. Overall, these findings suggest that biased public information inherent in news sentiment serves to irrationalize investors’ acquisition of firm-specific information through a biased perception of uncertainties in the risky asset payoff.

Keywords: Biased Belief, Information Acquisition, News Sentiment, Risk Premium

JEL Classification: G11, G12, G14, G41

Suggested Citation

Liu, Jiatao, Biased News and Irrational Investors: Evidence from Biased Beliefs about Uncertainty and Information Acquisition (August 1, 2020). Available at SSRN: https://ssrn.com/abstract=3697139 or http://dx.doi.org/10.2139/ssrn.3697139

Jiatao Liu (Contact Author)

Xi’an Jiaotong-Liverpool University ( email )

Business Building (BS), South Campus, 8 Chongwen
, Lake Science and Education Innovation District
Suzhou, 215123
China

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