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In this paper we present results from an event study based on a unique data set of corporate news in the media. The data is provided by Media Tenor, a research institute which collects and rates all corporate news from the most important German daily newspapers and TV news. Our analysis is based on roughly 300,000 corporate news on 125 large- and medium-sized companies in 5 large daily newspapers and 7 TV news shows from Germany between July 1998 and October 2006. Since media analysts rate the news, we have an exogenous measure whether news are good or bad news for a company. Based on this data we can show that the incorporation of information in prices is fairly fast. The main price reaction occurs on the day of the arrival of the new information. This price jump is especially large if the news coverage in the media is accompanied by ad hoc announcements made by the corporation itself. While there is only a very short-term post-event drift after good news, prices tend to drift for several days after bad news. The post-event trading volume is significantly higher than before the news for several days for good as well as bad news. To provide a test of the model of Hong and Stein (1999) we define several proxies for the speed of the information diffusion through different investor groups. We find that for smaller companies with lower abnormal media coverage the information diffusion is indeed slower, as predicted by theory.
Abstract
The Role of Media Coverage in the Information Diffusion Process in the Stock Market
Schmitz, PhilippIn this paper we present results from an event study based on a unique data set of corporate news in the media. The data is provided by Media Tenor, a research institute which collects and rates all corporate news from the most important German daily newspapers and TV news. Our analysis is based on roughly 300,000 corporate news on 125 large- and medium-sized companies in 5 large daily newspapers and 7 TV news shows from Germany between July 1998 and October 2006. Since media analysts rate the news, we have an exogenous measure whether news are good or bad news for a company. Based on this data we can show that the incorporation of information in prices is fairly fast. The main price reaction occurs on the day of the arrival of the new information. This price jump is especially large if the news coverage in the media is accompanied by ad hoc announcements made by the corporation itself. While there is only a very short-term post-event drift after good news, prices tend to drift for several days after bad news. The post-event trading volume is significantly higher than before the news for several days for good as well as bad news. To provide a test of the model of Hong and Stein (1999) we define several proxies for the speed of the information diffusion through different investor groups. We find that for smaller companies with lower abnormal media coverage the information diffusion is indeed slower, as predicted by theory.