Conclusions

We have analyzed a large dataset collecting coverage of stocks in traditional news media and
social media. We find the following robust stylized facts: High social media coverage at the stock
level predicts high subsequent return volatility and trading activity, while high news media
coverage predicts the opposite. It further appears that news media activity around a stock is a
leading indicator of social media coverage. This paper is among the first to directly compare news
and social media.
 Of all the active markets, the stock market receives the most attention from the media, probably because it
is the place where people get rich (and poor) quickly.

Why does the stock market react to news?

Negative news will normally cause people to sell stocks. A bad earnings report, a lapse in corporate
governance, big-picture economic and political uncertainty, and unfortunate occurrences all translate to
selling pressure and a decrease in the prices of many if not most stocks.

Good News/Bad News

Negative news will normally cause people to sell stocks. A bad earnings report, a lapse
in corporate governance, big-picture economic and political uncertainty, and unfortunate
occurrences all translate to selling pressure and a decrease in the prices of many if not most
stocks.

 
Wall Street traders don't try to follow the news. They try to anticipate it.

Positive news will normally cause individuals to buy stocks. Good earnings reports, an
announcement of a new product, a corporate acquisition, and positive economic indicators all
translate into buying pressure and an increase in stock prices.

When Bad News Is Good News

Bad news for some stocks is good news for others.

For example, news that a hurricane has made landfall may cause a decline in utility stocks, in
anticipation of costly emergency responses and repairs. Depending on the severity of the storm,
insurance stocks will take a hit on the news.

Meanwhile, the stocks of home improvement retailers will rise in anticipation of higher sales
over the months to come.

Anticipating the News

As noted, professional traders spend much of their time trying to anticipate the next news cycle,
so that they can buy or sell stocks before the real numbers are released. They use a number of
sources of information in this effort:

 Government economic reports. The employment report from the Bureau of Labor
Statistics is an indicator of the strength of the economy and the consumer. The U.S.
Census Bureau report on durable goods orders suggests how confident retailers are of the
 strength of spending in the months ahead. They are among many government reports that
are used as lagging indicators and leading indicators. Leading indicators, like those
durable goods orders, are more highly prized.
 Company and industry news. Quarterly reports are, literally, old news. Traders want to
know how orders are shaping up right now, what products are getting hot, and which
trends are dying.
 Gossip. Business news reports often note that a company's revenues or sales met or
failed to meet a "whisper number." This is exactly what it sounds like. In the absence of
hard facts, Wall Street professionals swap gossip, some of it based on solid information
and some not.

Unexpected News
There are events that simply cannot be anticipated, like a massive auto safety recall, a Mideast
crisis that drives up oil prices, or a prolonged drought that devastates crops.

Traders may think they're pricing in risks, but the possibilities for things going wrong are
limitless.

Thus, it's unexpected news – not just any old news – that drives prices in one direction or the
other.

Media and the financial markets: following the consensus opinion

Contradicting the efficient market hypothesis (EMH) (Malkiel & Fama,
1970), multiple scholars have found news media, and particularly
financial news, to influence the stock market to various extents
(e.g., Antweiler & Frank, 2004; Kleinnijenhuis, Schultz, Utz, &
Oegema, 2015; Tetlock, 2007). Ostensibly, the financial markets are
not efficient in a way that all available information is
instantaneously integrated in prices as assumed by proponents of the
EMH. Consequently, scholars from behavioral economics have questioned
the EMH and argued that financial markets are not solely governed by
rational market participants. Instead, not all investors can be
assumed to be equally well informed, having enough time and attention
to process and evaluate information. Thus, trading decisions are said
to be shaped and influenced by emotions, herd, and irrational
behavior (Nofsinger, 2005; Oberlechner & Hocking, 2004; Shiller,
2005). In this regard, the media have been identified to play a
significant role in shaping the consensus market opinion and evoking
this “herdlike” behavior (Davis, 2006; Oberlechner & Hocking, 2004;
Thompson, 2013). Davis (2006) contends that the widespread
availability of financial information among both professional and
retail investors leads market participants to react to new
information in a similar way (see also Shiller, 2005). In other
words, investors tend to observe how the financial market reacts to
certain news, trying to anticipate how the “herd” might react,
thereby taking advantage of an assumed direction of market movements.

The role of the media in shaping investor decisions has been shown in
multiple contexts. Lehavy and Sloan (2008) suggest that a company’s
media visibility affects its stock price to a greater extent than
financial information on firm fundamentals disseminated by the
company itself. Similarly, Bushee and Miller (2012) argue that firms
that are less visible to investors have less chance to attract
attention among market participants, even if they do disclose
information on the firm. These findings can be traced back to the
concept of attention-grabbing stocks (Barber & Odean, 2008) and the
supposition that investors need to get to know about the firm before
making an investment decision regarding it (Merton, 1987). Increased
media coverage leads to raised attention, which in turn makes the
stock more attractive to the investment community.