Media Coverage and the Cross‐Section of Stock Returns: The Chinese Evidence

Published date01 December 2019
AuthorYishun Wang,Kien Dinh Cao,Liping Zou
Date01 December 2019
Media Coverage and the Cross-
Section of Stock Returns: The
Chinese Evidence
School of Economics and Finance, Massey University, Auckland, New Zealand and
Faculty of Business Administration, Foreign Trade University, Hanoi, Vietnam
Using hand-collected news headlines for a large sample of listed rms in
China over a period of 20002015, we investigate the cross-sectional relation
between media coverage and stock returns. Our results document that no-
media coverage stocks earn 55 basis points a month higher than stocks that
are featured in the media. This result is robust after controlling for common
risk factors and is not driven by short-run return reversals. Further analysis
provides evidence to support the investor recognition hypothesis, suggesting
that mass media may play an incremental role in providing a supplement to
traditional channels of information dissemination. Therefore, results in this
paper are of interests to both investors and regulators on drivers of stock
JEL Codes: G12; G14; G15
Accepted: 16 March 2018
The effect of media on various aspects of stock markets has recently received
great attention from researchers and practitioners. Media is found to contribute
to the efciency of the stock market due to its dissemination of information to
the public (Peress 2014), predict stock returns (Tetlock 2007; Fang and Peress
2009), increase trading activities (Engelberg and Parsons 2011), enhance the
quality of corporate governance (Liu and McConnell 2013), and reduce the
information asymmetry among investors (Tetlock 2010; Dai et al. 2015; Rogers
et al. 2016). Extant literature also nd that media affects investorsbehavior in
a biased way (Gurun and Butler 2012; Hillert et al. 2014; Ahern and
Sosyura 2015).
However, almost all of studies on the media effect are conducted for the US
markets and very little is known for non-US markets. The purpose of this paper
is to ll this gap and provide evidence on the relation between media coverage
and the cross-section of stock returns for a large sample of Chinese stocks. We
hand-collect news headlines for 1500 Chinese stocks listed in Shanghai and
© 2018 International Review of Finance Ltd. 2018
International Review of Finance, 19:4, 2019: pp. 707729
DOI: 10.1111/ir.12191
Shenzhen stock exchanges during the 20002015 period. We document that
media coverage is signicantly related to a number of rm characteristics. Spe-
cically, we nd that large stocks and stocks with high idiosyncratic volatility
attract relatively high media attention. In addition, stocks covered by analysts
are also more likely to be featured in the media. However, rms with greater
institutional holdings and state ownerships exhibit lower media coverage. We
also nd that past month absolute returns are negatively related to media cover-
age. In a cross-sectional setting regarding the relation between the media cover-
age and the stock return, we nd strong evidence of return premiums for stocks
with no news compared to those that are featured in the news, even after con-
trolling for common risk factors. This no-coverage premium does not exhibit a
reversal when we extend the holding period of up to 12 months. Further analy-
sis also reveals that the no-media return premium is due to investor recognition
hypothesis proposed by Merton (1987). However, our evidence on illiquidity
hypothesis is weak, as opposed to Fang and Peress (2009).
This study contributes to the increasingly attractive literature on the media
effect for a number of reasons. Firstly, it is among few papers that examine the
media coveragestock return relationship for non-US markets. Ferguson
et al. (2015) investigate the effects of both tone and volume of rm-specic
news media on the stock returns in the UK. They show the signicance of both
news effects with the volume effect being more pronounced. Aman
et al. (2016) nd that television media in Japan is associated with higher trad-
ing volume and greater price change. Grifn et al. (2011) examine the informa-
tion effect of media for 56 countries around the world and nd that the effect
of public news on a rms stock price on news days is signicant for developed
markets. They do not nd signicant news effects for emerging markets, which
is mainly explained by the existence of insider trading in these markets.
Second, the news data for this study is hand collected from a media outlet
that is quite popular to all types of investors, big or small, individual or institu-
tional. These media headlines are in local language, meaning that local inves-
tors, who are dominant in Chinese stock markets, are able to read and assess
the news about the rms. This media sample is unique and in contrast to other
studies that their media sample is in English. Our sample of 1500 rms is much
larger than the 235 Chinese rms included in Grifn et al. (2011) and covers a
longer time period (20002015 versus 20032009). In addition, this study
examines the effect of media coverage on stock return premium, which is differ-
ent from examining the relevance of news by Grifn et al. (2011).
Third, the examination of media and stock returns in China is of interests to
both investors and regulators. China is characterized as one of the countries
with heavy control of media with its freedom of press being consistently ranked
at the low end in the world by the Reporters without Borders Organization.
This heavy control of media by the government could induce a strong bias on
the tone of the media since the government is more likely to see media report
© 2018 International Review of Finance Ltd. 2018708
International Review of Finance

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