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Media Coverage and the Cross-section of Stock Returns

Sovereign wealth funds are another sub category of institutional investor that have risen in importance in recent years. As their names suggest they are institutions constituted to manage national wealth, the source of which typically arises from significant trade surpluses. Whilst a number of them have existed for many years the long period of economic growth between 2003 and 2007, which was marked by considerable East-West trade and a protracted bull market in commodities, generated significant trade surpluses in oil producing countries such as in the Middle East, Norway, Russia and exporters such as China and Singapore. Benchmarked performance Whatever the pool. | THE JOURNAL OF FINANCE VOL. LXIV NO. 5 OCTOBER 2009 Media Coverage and the Cross-section of Stock Returns LILY FANG and JOEL PERESS ABSTRACT By reaching a broad population of investors mass media can alleviate informational frictions and affect security pricing even if it does not supply genuine news. We investigate this hypothesis by studying the cross-sectional relation between media coverage and expected stock returns. We find that stocks with no media coverage earn higher returns than stocks with high media coverage even after controlling for well-known risk factors. These results are more pronounced among small stocks and stocks with high individual ownership low analyst following and high idiosyncratic volatility. Our findings suggest that the breadth of information dissemination affects stock returns. Mass media outlets such as newspapers play an important role in disseminating information to a broad audience especially to individual investors. Every weekday some 55 million newspaper copies are sold to individual readers in the United States reaching about 20 of the nation s population. If we consider online subscriptions and multiple readers per copy the actual readership of the printed press is even larger and certainly far broader than other sources of corporate information such as analyst reports. Given mass media s broad reach one might expect it to affect securities markets. Interest in the relation between media and the market has been on the rise among both researchers and practitioners. Klibanoff Lamont and Wizman 1998 Tetlock 2007 and Tetlock Saar-Tsechansky and Macskassy 2008 are examples of this growing literature.1 We contribute to this strand of research by examining the cross-sectional relation between mass media coverage and stock returns. We find that stocks not covered by the media earn significantly higher future returns than stocks that are heavily covered even after accounting for widely accepted risk characteristics. A portfolio of .