Media Coverage and Stock Returns
Ninety Years of Media Coverage and the Cross-Section of Stock Returns
- Hillert and Ungeheuer
- A version of the paper can be found here.
- Want a summary of academic papers with alpha? Check out our Academic Research Recap Category.
Using a novel dataset on New York Times coverage of U.S. firms from 1924 to 2013, we re-examine the relation between media coverage and stock returns. The relation between changes in media coverage and returns is consistent with an attention-driven price pressure effect: Top-quintile outperform bottom-quintile coverage-change stocks by 10.68% during the formation year. Over the next two years, these stocks underperform their counterparts by 5.04%. In contrast to previous findings, the level of media coverage positively predicts stock returns. Top-quintile outperform bottom-quintile coverage stocks by 2.76% per year. This strategy is investable, exhibits an annual portfolio turnover of only 33%, does not depend on illiquid stocks, and attains a Sharpe Ratio of 0.48 (Momentum: 0.49).
This paper uses a novel dataset based on New York Times coverage from 1924 to 2013 (90 years), and re-examines the relationship between media coverage and stock returns. There are multiple findings and test in the paper, but highlight the primary hypothesis the authors address:
- Does an increase in media coverage lead to temporary overvaluation?
In the paper, the authors use annual New York Times coverage as the proxy for media coverage. The data is obtained from the New York Times Chronicle webpage. The authors include all ordinary U.S. firms listed on NYSE, AMEX and NASDAQ between 1926 to 2014 in their sample and then search for firm-specific articles using historical company names.
The paper finds that stocks with a strong increase in media coverage significantly outperform stocks with a strong decrease in media coverage during the formation year. But in the subsequent two years, the results show an impact-reversal pattern.
Figure 2 displays the cumulative long-short returns of buying (selling) stocks with increases (decreases) in media coverage from the beginning of the formation year t to the end of the third year after formation t+3. In the formation year, the stocks with a strong increase in media coverage outperform stocks with a strong decrease by 10.68%. In the subsequent three years, these stocks underperform their coverage decrease counterparts by 5.04%.
This impact-reversal pattern has been discovered in a shorter time period. Engelberg, Sasseville and Williams (2010) find that stock recommendations by Jim Cramer (Mad Money Show) lead to large overnight returns but subsequently reverse over the subsequent several months.
Beware of overreaction. Dramatic increases in media coverage may attract investor attention and lead to a short-term momentum effect, but such price moves reverse over time.
We believe true momentum, which is sustained and persistent, is driven by continuous, gradual information that is only gradually reflected in stock prices. As an example, check out the Frog-in-the-pan momentum theory.***
Please remember that past performance is not an indicator of future results. Please read our full disclaimer. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. This material has been provided to you solely for information and educational purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and Alpha Architect to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Alpha Architect.***
If you liked this post, don't forget to subscribe to our blog.