The Effect of News on Volatility: A Study of Ipos

Abstract

We examine the relationship between firm news and volatility over time. Contrary to the negative relationship between idiosyncratic news and firm volatility predicted by current theories, we document a positive relationship between firm level news and firm level volatility. We confirm, as conjectured in prior literature, an increase in idiosyncratic IPO volatility over the period from 1973 through 2003. We find the increase in volatility is over twice as large for IPOs as for firms matched to the IPOs based on size and book to-market ratio. We also develop a comprehensive database consisting of 129,737 observations of news disclosures by recent IPO and matching firms, and we use the database to document the distribution of news day returns. Keeping the media sources of news constant, we find that the number of news citations per firm has risen sharply over the last three decades, and the stock price reaction to news has become significantly larger. Our final contribution presents evidence that the increased idiosyncratic volatility for both IPOs and matching firms is significantly related to an increase in news in recent decades. In fact, an increase of just one extra news day per month adds 0.6% to the monthly standard deviation for IPOs, or 2.1% per year.

Keywords: Information, news, volatility, IPOs