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Rumor Has It -- Sensationalism in Financial Media

Rumor Has It -- Sensationalism in Financial Media

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Published by Anthony DeRosa
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Published by: Anthony DeRosa on Mar 19, 2014
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Rumor Has It: Sensationalism in Financial Media
Kenneth R. Ahern
University of Southern California
Denis Sosyura
University of Michigan
Abstract
The media has an incentive to publish sensational news. We study how this incentiveaffects the accuracy of media coverage in the context of merger rumors. Using a noveldataset, we find that accuracy is predicted by a journalist’s experience, specialized edu-cation, and industry expertise. Conversely, less accurate stories use ambiguous languageand feature well-known firms with broad readership appeal. Investors do not fully ac-count for the predictive power of these characteristics, leading to an initial target priceoverreaction and a subsequent reversal, consistent with limited attention. Overall, weprovide novel evidence on the determinants of media accuracy and its effect on assetprices. (
JEL
 G14, G34, L82)
We thank Zhi Da, Harry DeAngelo, David Hirshleifer, Tim Loughran, Jo¨el Peress, David Solomon,Paul Tetlock, Karin Thorburn, and seminar participants at Alberta School of Business, 2013 Eco-nomics of Strategy Workshop at NYU, 2013 Southern California Finance Conference, 2013 Univer-sity of British Columbia Summer Finance Conference, 2013 University of Miami Behavioral FinanceConference, and University of Southern California for comments. Ahern: University of Southern Cal-ifornia, Marshall School of Business, 3670 Trousdale Parkway, Los Angeles, CA 90089 (email: ken-neth.ahern@marshall.usc.edu); Sosyura: University of Michigan, Ross School of Business, 701 TappanStreet, Ann Arbor, MI 48109 (dsosyura@umich.edu).
 
Rumor Has It: Sensationalism in Financial Media
Abstract
The media has an incentive to publish sensational news. We study how this incentiveaffects the accuracy of media coverage in the context of merger rumors. Using a noveldataset, we find that accuracy is predicted by a journalist’s experience, specialized edu-cation, and industry expertise. Conversely, less accurate stories use ambiguous languageand feature well-known firms with broad readership appeal. Investors do not fully ac-count for the predictive power of these characteristics, leading to an initial target priceoverreaction and a subsequent reversal, consistent with limited attention. Overall, weprovide novel evidence on the determinants of media accuracy and its effect on assetprices. (
JEL
 G14, G34, L82)
 
RUMOR HAS IT 1
The business press plays a key role in capital markets as a distributor of information(Tetlock, 2010; Engelberg and Parsons, 2011; Peress, 2013). This role is not passive, how- ever, as business newspapers actively compete for readership. To win readers’ attention,newspapers have an incentive to publish sensational stories, namely attention-grabbing,speculative news with broad readership appeal. Understanding this incentive is impor-tant. Media coverage that is skewed towards speculative stories, possibly at the expenseof accuracy, could distort investors’ beliefs and impact asset prices. While prior researchshows that the incidence of media coverage influences financial markets, there is relativelylittle evidence on its accuracy.In this paper, we study accuracy in the business press in the context of merger rumors.These stories attract a broad audience because mergers have a dramatic impact on awide range of corporate stakeholders. For employees, customers, and rivals, mergers leadto layoffs, discontinued products, and increased competition, in addition to the 15–20%abnormal return realized by target investors. At the same time, merger rumors provide aconvenient setting to study accuracy in the press because we can observe
 ex post 
 whethera rumor comes true.To illustrate the trade-off between readership appeal and accuracy, consider an articlethat appeared on the front page of the
 Seattle Times 
 on September 2, 1993, entitled,“Could GE Buy Boeing? It’s Speculation Now, But Not Entirely Far-Fetched.” Thearticle states,
A scenario by which fiercely independent Boeing succumbs to an oppor-tunistic corporate raider has been quietly percolating in certain corners of Wall Street for the past year...GE’s ambitious Chairman Jack Welch, 57,has been taking steps to position GE to make a major acquisition...Althoughhe hasn’t said so explicitly, Welch appears to covet Boeing.
A letter to the editor that was published a few days later provides insight into how thisarticle was received by readers. The letter states,

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