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News
Dissemination
and
the
Impact
of
the
Business
Press
Eugene
Soltes
University
of
Chicago,
Booth
School
of
Business
esoltes@chicagogsb.edu
January
2009
Abstract
I
investigate
the
role
of
information
distribution
in
financial
markets
by
examining
news
dissemination
by
the
business
press.
Greater
dissemination
of
firm
news
is
hypothesized
to
lower
the
cost
of
information
acquisition
and
increase
firm
visibility.
Through
instrumentation,
I
examine
the
causal
effects
of
differential
news
dissemination
on
bid
‐
ask
spreads,
trading
volume,
and
idiosyncratic
volatility.
I
find
that
greater
dissemination
lowers
bid
‐
ask
spreads,
increases
trading
volume,
and
lowers
idiosyncratic
volatility.
Ultimately,
the
results
suggest
that
how
information
is
distributed,
even
when
public,
is
important.
I
would
like
to
thank
my
committee
members,
Doug
Skinner
(chair),
Christian
Leuz,
Abbie
Smith,
and
Suraj
Srinivasan,
for
their
guidance
and
support.
I
would
also
like
to
thank
Andrea
Frazzini,
Matthew
Gentzkow,
Roni
Kisin,
Steven
Levitt,
David
Solomon,
and
workshop
participants
at
the
University
of
Chicago
for
their
helpful
feedback
on
the
paper.
Discussions
with
editors
at
numerous
business
publications
have
significantly
enhanced
my
understanding
of
the
press.
I
am
indebted
to
Paul
Steiger
(the
Wall
Street
Journal
),
Betty
Wong
(Reuters),
Michael
Becker
and
Neil
Hershberg
(Business
Wire),
Michelle
LaRoche
(Dow
Jones
News
Service),
Kyle
Pope
(
Portfolio
),
and
Bob
Tippee
(
Oil
&
Gas
Journal
)
for
these
discussions.
1
1.
Introduction
Firms
publicly
disclose
news,
either
voluntarily
or
through
regulation,
to
provide
information
to
investors.
An
investor’s
access
to
this
information
is
generally
regarded
as
being
uninhibited.
In
particular,
researchers
normally
assume
that
firm
news,
once
publicly
disclosed,
is
diffused
to
all
investors.
1
As
a
result,
the
way
in
which
information
is
disseminated,
or
transmitted,
to
investors
is
not
a
major
consideration.
This
paper
challenges
this
view
by
investigating
how
public
information
is
disseminated.
Specifically,
I
examine
how
cross
‐
sectional
variation
in
the
dissemination
of
news
by
the
business
press
affects
three
measures
of
firm
‐
level
market
activity:
bid
‐
ask
spreads,
trading
volume,
and
idiosyncratic
volatility.
I
find
that
greater
dissemination
causally
leads
to
lower
spreads,
increased
share
turnover,
and
lower
idiosyncratic
volatility.
Ultimately,
the
results
suggest
that
how
information
is
distributed,
even
when
public,
is
important.
The
business
press
provides
a
convenient
setting
to
investigate
the
role
of
public
‐
information
dissemination
for
two
reasons.
First,
the
business
press
is
an
important
mechanism
for
distributing
information.
Most
investors
rely
on
newswires
and
publications
to
receive
firm
news.
Variation
in
the
distribution
of
news
by
the
press
directly
affects
the
readership
of
the
information.
Thus,
the
press
offers
a
powerful
setting
to
examine
if
differential
distribution
of
information
is
important.
Second,
the
production
and
dissemination
of
information
can
be
separated
in
the
context
of
the
press.
The
impact
of
differential
distribution
should
only
capture
1
For example, Merton (1987) notes the common assumption “that the diffusion of every type of publicly availableinformation takes place instantaneously among all investors” (485). A somewhat less stringent view is that publicinformation is available to all investors at a very low cost.
2
the
effect
of
news
dissemination.
By
varying
the
accessibility
of
news,
but
not
its
content,
I
am
able
to
isolate
the
dissemination
impact
of
the
press.
One
obstacle
in
investigating
the
effect
of
news
dissemination
on
trading
volume
and
idiosyncratic
volatility
is
the
endogeneity
of
press
coverage.
In
the
case
of
volatility,
more
significant
firm
‐
initiated
news
will
elicit
more
press
coverage
and
a
greater
market
response.
2
Thus,
even
if
the
press
has
no
impact,
press
coverage
and
volatility
will
be
correlated.
Additional
measurement
issues
are
created
by
simultaneity
bias.
Press
coverage
is
hypothesized
to
affect
idiosyncratic
volatility,
but
the
level
of
volatility
also
affects
the
amount
of
press
coverage
a
firm
receives.
Consequently,
an
ordinary
least
squares
(OLS)
estimate
of
the
press’
effect
on
idiosyncratic
volatility
will
be
both
biased
and
inconsistent.
The
use
of
instrument
variables
(IV)
alleviates
the
endogeneity
problem
and
permits
causal
inferences
about
the
impact
of
the
press.
To
implement
two
stage
least
squares
(2SLS),
I
create
two
instruments.
The
instruments
measure
the
presence
of
other
information
which
affects
the
likelihood
that
a
firm’s
press
release
receives
media
coverage.
These
competing
sources
of
information
include
both
noncorporate
news
(e.g.,
political,
world
events)
and
business
news
issued
by
other
firms.
I
show
that
firms
receive
lower
aggregate
press
coverage
when
they
issue
more
press
releases
on
busier
news
days.
After
instrumenting
for
press
coverage,
I
find
the
dissemination
effect
of
the
press
to
be
both
large
and
statistically
significant.
Investigating
the
causal
dissemination
impact
of
the
press
contributes
to
research
on
the
effects
of
disclosure
and
the
impact
of
financial
media.
Disclosure
studies
normally
assume
that
firms
select
a
level
of
disclosure.
Researchers
posit
that
this
disclosure
choice
has
direct
capital
‐
2
This may be due to the greater news content and/or the newsworthiness of the story.
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