Newspaper Closures and Trading in Local Stocks

Abstract

There is increasing awareness of how local media affects financial markets, but also of the endogeneity of media coverage. We separate the causal impact of local media on financial markets from selection effects using a new, hand-collected database of newspaper closures. We find that at least 29% of local newspaper closures are driven by distress, and thus, likely endogenous to local economic conditions. Return volatility and idiosyncratic risk decrease significantly after non-distress-driven newspaper closures, but increase after distress-driven closures, suggesting the presence of substantial selection effects. We find similar patterns for liquidity and trading. Once we account for selection, the estimated impact of local newspapers on volatility increases by over 40%. The reduction in volatility after non-distress-driven newspaper closures is larger for stocks subject to greater information frictions, lower national media coverage, firms located in remote areas, and during recessions. All these tests suggest that investor information processing is the main channel driving our results. Our findings highlight that the effect of media on financial markets may be larger than previously documented.

Keywords: media coverage, information processing, financial markets, return volatility, trading

JEL Classification: G14, G33, L82