Media Narratives and Price Informativeness

Abstract

We show that an increase in stock return exposure to media attention to narratives, measured with standard methods for extracting topic attention from news text, leads to a lower stock price informativeness about future fundamentals. Empirically, narrative exposure explains over 86% of idiosyncratic variance in the cross-section, and both narrative exposure and non-systematic information channels—idiosyncratic variance and variance related to public information—decrease stock price informativeness. Moreover, stocks with high narrative exposure demonstrate elevated trading volume. To rationalize these results, we develop a theoretical model based on investor disagreement stemming from differential interpretations of media narratives.

Keywords: media narratives, media bias, price informativeness, idiosyncratic risk, noise trading, disagreement, latent demand

JEL Classification: G11, G12, G13, G17