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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 investi-
gate 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 disseminat-

ing 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 con-
sider 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 re-
lation 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 character-
istics. A portfolio of stocks with no media coverage outperforms a portfolio of

∗ Lily Fang and Joel Peress are both at INSEAD. We would like to thank Bernard Dumas,
Edward Fang, Harald Hau, Pierre Hillion, Harrison Hong, Soeren Hvidkjaer, Charles Jones,
Massimo Massa, Steve Monahan, Paul Tetlock, Clara Vega, Kent Womack, Lu Zheng, and semi-
nar participants at Imperial College London, INSEAD, Lehman Brothers, Numeric Investors LLC,
University of Wisconsin Madison, and Singapore International Conference on Finance (2007) for
helpful comments and discussions. We are also grateful to an anonymous referee and Campbell
Harvey (the editor) for many insightful comments and detailed suggestions. We thank William Fisk,
Shirish Tatikonda, Pradeed Mittal, Ananda Kumar, Sriram Ganesan, and Sriram Subramaniam
for outstanding assistance with the data collection process.
1
A detailed literature review appears in Section I.

2023
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2024 The Journal of FinanceR

stocks with high media coverage by 3% per year following portfolio formation
after adjusting for market, size, book-to-market, momentum, and the Pastor-
Stambaugh (2003) liquidity factor. The return difference is particularly large
among small stocks, stocks with low analyst coverage, stocks primarily owned
by individuals, and stocks with high idiosyncratic volatility. In these subsam-
ples, the “no-media premium” ranges from 8% to 12% per year after risk ad-
justments. Thus, the return premium for stocks with no media coverage is
economically significant.
The rational-agent framework provides two main explanations for the no-
media premium in the cross-section. First, it may be a liquidity-related phe-
nomenon. If the no-media premium ref lects a mispricing (i.e., arbitrage), then
profit-motivated traders will take positions to exploit and thereby eliminate
this mispricing. Thus, a mispricing can persist only if market frictions are
severe enough to prevent arbitrageurs from exploiting it. We call this the
“impediments-to-trade” hypothesis. Alternatively, the no-media premium may
represent compensation for imperfect diversification. The “investor recognition
hypothesis” advanced by Merton (1987) posits that in informationally incom-
plete markets, investors are not aware of all securities. As a consequence, stocks
with lower investor recognition need to offer higher returns to compensate their
holders for being imperfectly diversified. By disseminating information to a
wide audience, media coverage broadens investor recognition. Thus, stocks with
intense media coverage earn a lower return than stocks in oblivion.
Our empirical tests provide support for both hypotheses. In particular, we
find that the media effect is strong among small stocks and stocks with high
bid-ask spreads. These results are consistent with the impediments-to-trade
hypothesis. We also find that the no-media premium is particularly large among
stocks that face the most severe information problems, that is, stocks with low
analyst coverage, a high fraction of individual ownership, and high idiosyncratic
volatility. These findings suggest that mass media’s information dissemination
role is particularly important among stocks for which information tends to be
more “incomplete,” consistent with Merton (1987). We note, however, that while
impediments to trade may explain the persistence of the no-media premium,
it does not explain why it arises in the first place. Thus, our conclusion is that
the media effect is rooted in a Merton-type information story, and liquidity
constraints help perpetuate the phenomenon.
The media effect is not subsumed by a host of well-documented return anoma-
lies, including the postearnings announcement drift, IPO underperformance,
and delisting bias. We also show that it is not driven by industry biases, differ-
ences in fundamental performance, and the bid-ask bounce. Finally, it is robust
to different portfolio formation and holding periods. In particular, the return
premium among no-coverage stocks is remarkably stable for at least 12 months.
Given publication delays, it is unlikely that information contained in mass
print media is genuine news. But mass media does disseminate information
to a broad audience. Thus, our finding on the role of the media indicates that
the breadth of information dissemination affects stock returns. An interesting
implication of our results is that noninformative channels such as mass media
 15406261, 2009, 5, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2009.01493.x by Sichuan University, Wiley Online Library on [06/03/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
Media Coverage and the Cross-section of Stock Returns 2025

and even firms’ public relation programs can affect firms’ cost of capital. While
market participants and company executives recognize that information dis-
semination plays a crucial role in determining the cost of capital, traditionally
the focus has been on channels such as disclosure and stock analyst reports.
In recent years, reforms in the securities industry, such as Reg FD and the
Global Settlement between regulators and Wall Street research departments,
have led to the (perhaps unintended) consequence that many stocks, including
some listed on the NYSE, no longer enjoy analyst coverage. The Wall Street
Journal has reported numerous anecdotes in which executives are concerned
about the lack of analyst coverage on their stock and the adverse effect on their
stock price. Our results indicate that for firms suffering from reduced analyst
coverage, mass media coverage as well as firms’ public relations efforts aimed
at creating awareness and familiarity could pay off in terms of generating in-
vestor interest and reducing the cost of capital, especially in the post Reg FD
environment.2
The remainder of the paper is organized as follows. Section I reviews the
literature. Section II describes our data. Sections III and IV present and discuss
the main empirical results. Section V concludes.

I. Literature Review
This paper is related to the literature on the relation between media and stock
returns, and the literature on the cross-sectional pattern of stock returns.

A. The Media and the Stock Market

Earlier papers in this literature include Klibanoff et al. (1998), who showed
that country-specific news reported on the front page of the New York Times
affects the pricing of closed-end country funds. They find that during weeks
of front-page news, price movements are more closely related to fundamen-
tals. They therefore argue that news events lead some investors to react more
quickly. More recently, Tetlock (2007) analyzes the linguistic content of the
mass media and reports that media pessimism predicts downward pressure
and a subsequent reversal. Tetlock et al. (2008) further document that the frac-
tion of negative words used in news stories predicts earnings and stock returns.
These findings suggest that qualitative information embedded in news stories
contributes to the efficiency of stock prices.
Among papers that examine broadly defined media exposure, ours is the first
that documents a cross-sectional relation between media coverage and security
returns. Several recent papers document a positive relation between media and
liquidity but fail to find significant return differentials. For example, Antweiler
and Frank (2004) find that stock messages predict market volatility but their

2
Reports confirm that companies are paying more attention to mass media after Regulation FD.
According to a survey conducted in 2004 by Thomas L. Harris/Impulse Research, companies have
increased spending on public relations by an average of 28% compared to that a year ago.
 15406261, 2009, 5, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2009.01493.x by Sichuan University, Wiley Online Library on [06/03/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
2026 The Journal of FinanceR

effect on returns is small. Grullon, Kanatas, and Weston (2004) document that
firms with larger advertising expenditures have more liquid stocks. Frieder and
Subrahmanyam (2005) report that individuals are more likely to hold stocks
with strong brand recognition. Meschke (2004) finds that stocks experience a
strong run-up and reversal during the 11 days after CEO interviews on CNBC.
None of these papers finds persistent cross-sectional return patterns.3
Our paper is closely related to but distinct from Chan (2003), who exam-
ines momentum and reversal patterns following large price moves with and
without accompanying news. Using data obtained mainly from the Dow Jones
Newswire, Chan (2003) focuses on headline news. In contrast, we enumerate ar-
ticles (not necessarily headlines) in mass-circulation newspapers and focus on
coverage. We note that “news” and “coverage” are indeed different: Many stocks
with news (headlines in the Dow Jones Newswire) remain neglected by mass
media; in addition, while newswires are released in real time and contain gen-
uine news, this is unlikely to be the case for mass print media due to publication
lags. Another distinction is that Chan (2003) looks at market reactions to news
in the time dimension (and the difference therein between winners and losers),
whereas we examine the cross-sectional differences between stocks with and
without coverage. We defer a more detailed discussion of the relation between
our results and those in Chan (2003) to Section IV.
Our paper is also related to Barber and Odean (2008), who show that in-
dividual investors are net buyers of attention-grabbing stocks, for example,
stocks in the news.4 They argue that individuals face difficulties when choos-
ing which stocks to buy from a large pool of candidates; thus, attention-grabbing
stocks such as those in the news are more likely to enter their choice set. This
buying pattern seems consistent with the media effect we document to the
extent that individuals’ buying pressure temporarily pushes up the prices of
attention-grabbing (in-the-news) stocks, but such pressure subsequently re-
verses. Whether the media effect is driven by individual buying pressure is
examined in Section III below.

B. The Determinants of Stock Returns in the Cross-section

Our paper is also related to the literature that analyzes the determinants
of the cross-section of stock returns. Among recent studies in this literature,
two papers are related to ours. Diether, Malloy, and Scherbina (2002) (DMS)
document that stocks with higher analyst forecast dispersion yield lower future
returns. Ang et al. (2006) (AHXZ) document that stocks with high idiosyncratic

3
A separate stream of research represented by Mullainathan and Shleifer (2005) and Gentzkow
and Shapiro (2006a, 2006b) studies media bias. In addition, an older literature examines market
reactions to rumors featured in the popular “Heard on the Street” column in the Wall Street Journal
(see, for example, Pound and Zeckhauser (1990)).
4
In a related paper, Kumar and Lee (2006) show that individual investors trade in concert and
that systematic retail trading explains return comovements for stocks with a high retail concen-
tration. This paper leaves open the question of the origin of the systematic component of retail
trades. Barber and Odean (2008) suggest that one source could be mass media coverage.
 15406261, 2009, 5, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2009.01493.x by Sichuan University, Wiley Online Library on [06/03/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
Media Coverage and the Cross-section of Stock Returns 2027

volatility (with respect to the Fama-French (1993) three-factor model) exhibit

“abysmally” low returns. We find that media coverage is positively related to
both analyst forecast dispersion and idiosyncratic volatility, after controlling
for firm size.5 Thus, our result that no-coverage stocks earn higher returns is
consistent with both the DMS finding and the AHXZ finding. In Section IV, we
discuss in more detail the relations between these results and show that the
media effect is not subsumed under either effect.
Finally, another related paper is Easley, Hvidkjaer, and O’Hara (2002), who
investigate whether information asymmetry between informed and uninformed
traders is a determinant of asset returns. The authors propose and estimate a
proxy for asymmetric information called PIN (Probability of Informed Trading)
and show that it has incremental explanatory power for cross-sectional returns
after controlling for size and book-to-market. Our analysis reveals that the me-
dia effect is not explained by PIN, suggesting that the media effect we document
is not driven by information asymmetries between informed and uninformed
traders.

II. Data and Descriptive Statistics

Our sample consists of all companies listed on the NYSE and 500 ran-
domly selected companies listed on the NASDAQ between January 1, 1993 and
December 31, 2002. The NYSE universe contains mainly large stocks. To the
extent that large stocks enjoy good information dissemination, our sample is bi-
ased against finding any media effect. Following prior work, we exclude stocks
with prices below $5 to ensure that results are not driven by small illiquid
stocks or bid-ask bounce.
We use the number of newspaper articles about a stock to proxy for the stock’s
overall media exposure.6 To collect this information, we systematically search
the LexisNexis database for articles published in major U.S. newspapers that
refer to the companies in our sample. We focus on four inf luential daily newspa-
pers with nationwide circulation: New York Times (NYT), USA Today (USAT),
Wall Street Journal (WSJ), and Washington Post (WP). With weekday circula-
tion of about six million copies, these four newspapers account for 11% of total
daily circulation in the United States.7
For each company in our sample, we obtain from LexisNexis its associated
indexing keywords. We then manually match these company names with other

5
Vega (2006) also documents that media coverage and analyst forecast dispersion are positively
correlated.
6
The rise of the internet in recent years as a mainstream media could have a large impact on
the relevance of print media. Our sample ends in 2002, which diminishes this impact.
7
Our sample includes four of the five most circulated newspapers in the United States. According
to the Audit Bureau of Circulation, the WSJ, NYT, WP, and USAT had average daily circulations
of 1.8, 1.1, 0.7, and 2.2 million paid copies, respectively (from April 1, 2002, to September 30,
2002). According to the Newspaper Association of America, the aggregate daily circulation of all
newspapers is 55 million.
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2028 The Journal of FinanceR

standard data sets.8 LexisNexis uses a “relevance score” to measure the quality
of the match between an article and a company. This score is based on criteria
such as the keyword’s frequency, and its weight and location within the docu-
ment. To capture articles with a primary focus on a given company, we retain
articles with a relevance score of 90% or above, which LexisNexis describes as
“Major References.” To obtain a time series of company-specific coverage, we
take the weighted sum of articles published about each company in each month,
where weights equal the newspapers’ circulation in 2002, obtained from the Au-
dit Bureau of Circulations.
We obtain stock return, market capitalization, and trading volume data from
CRSP, and accounting data, such as book value of assets, from Compustat.
Analyst coverage data are collected from I/B/E/S summary files. We measure
analyst coverage for each firm and year in our sample by counting the number
of analysts making fiscal year-end forecasts. We also estimate the fraction of
individual ownership for each stock and year as 1 minus the fraction of total
institutional ownership, obtained by aggregating 13f filings.
Table I provides summary statistics on the newspaper coverage of our sample
stocks. Panels A, B, and C pertain to all, NYSE, and NASDAQ stocks, respec-
tively. For brevity, Panel A reports annual statistics, whereas Panels B and C
report average statistics over the entire period. We report both unconditional
coverage statistics, namely, the fraction of firms covered by each source, and
conditional statistics, namely, the number of newspaper articles per covered
stock.
Several interesting observations can be made about media coverage patterns.
First, overall newspaper coverage is surprisingly low. Even among NYSE stocks,
which are generally large, over 25% are not featured in the press in a typical
year. Coverage is even lower for NASDAQ stocks, with only about 42% of them
receiving coverage in a given year. Second, the breadth of coverage differs con-
siderably across newspapers. WSJ and NYT have the most comprehensive cov-
erage, featuring 57% and 54% of NYSE stocks, respectively. WP and USAT have
significantly less coverage. In particular, while NYT, WP, and USAT together
cover 56% of firms, NYT alone covers 54%, indicating that the incremental cov-
erage by WP and USAT is only 2%. Finally, the numbers also imply that there
is considerable overlap—about 75%—in the different newspapers’ coverage.9
This overlap together with the low marginal contribution of widely circulated
newspapers such as USAT and WP indicates that even though we focus on only
four papers, our data are representative of the newspaper media. To the extent
that coverage is correlated across media types, our data are also a reasonable
proxy of overall media coverage.

8
Data errors and omissions could create sampling error. LexisNexis tries to minimize this prob-
lem by associating each company with multiple keywords. For example, IBM is associated with
both “IBM” and “International Business Machine.”
9
Wall Street Journal alone covers 59% of NYSE stocks. The three nonfinancial papers combined
cover 57% of NYSE stocks (Panel B of Table II). But all four papers combined cover 73%, indicating
that the overlap between WSJ and the nonfinancial papers is around 75%.
 15406261, 2009, 5, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2009.01493.x by Sichuan University, Wiley Online Library on [06/03/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
Media Coverage and the Cross-section of Stock Returns 2029

Table I
Summary Statistics of Newspaper Coverage
This table presents summary statistics for the newspaper coverage of our sample firms. Both
unconditional statistics (percentage of firms receiving coverage) and conditional statistics (number
of articles written on the firm conditioned on coverage) are presented. The column “All papers”
refers to all four national newspapers in our sample: Wall Street Journal (WSJ), New York Times
(NYT), Washington Post (WP), and USA Today (USAT). The column “Excl. WSJ” represents the
three nonfinancial papers: NYT, WP, and USAT.

Unconditional Coverage Statistics Conditional Statistics

Fraction of Stocks Covered by No. of Articles

Year All Papers WSJ Excl. WSJ NYT WP USAT Mean Median

Panel A: All Stocks

1993 0.77 0.61 0.60 0.58 0.12 0.07 11 4
1994 0.75 0.60 0.59 0.58 0.12 0.07 12 5
1995 0.75 0.61 0.60 0.59 0.11 0.07 11 5
1996 0.72 0.56 0.60 0.59 0.12 0.06 11 5
1997 0.73 0.56 0.61 0.59 0.13 0.06 11 5
1998 0.75 0.59 0.64 0.62 0.15 0.06 11 5
1999 0.68 0.58 0.50 0.47 0.15 0.04 12 4
2000 0.63 0.52 0.49 0.46 0.14 0.05 12 4
2001 0.62 0.52 0.44 0.42 0.14 0.05 12 4
2002 0.57 0.46 0.44 0.41 0.16 0.04 12 4
All years 0.70 0.57 0.56 0.54 0.13 0.06 12 5

Panel B: NYSE Stocks

All years 0.73 0.59 0.59 0.57 0.14 0.06 12 5

Panel C: NASDAQ Stocks

All Years 0.42 0.31 0.27 0.24 0.05 0.02 4.2 2

The conditional statistics in Table I reveal that coverage is highly skewed.

The average number of articles published about a stock in a given year is 12,
while the median is 5, and the maximum is 478. This pattern prevails for both
NYSE and NASDAQ stocks, but the coverage statistics generally are three to
four times larger for NYSE stocks than those for NASDAQ stocks.
Thus, there is a large difference between the “haves” and “have nots” in terms
of media coverage. Transition matrices across coverage types confirm that me-
dia coverage is a persistent phenomenon: 83% of stocks with no media coverage
in a given month are still absent from the media in the next month; 49% of
stocks with high (above-medium) coverage continue to have high coverage in
the next month. Persistence is even stronger among smaller stocks. These re-
sults suggest that media coverage (or the lack thereof) is a relatively stable
firm characteristic. Notably, the sample stocks are all publicly listed firms, so
the heterogeneity in media coverage in the cross-section cannot be driven by a
drastically different amount of public disclosures such as earnings reports.
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2030 The Journal of FinanceR

30.00%

25.00%

20.00%
Percent of sample

15.00%

10.00%

5.00%

0.00%
0 1 2 3 4 5 6 7 8 9
1-digit SIC code

Stocks covered in the media Stocks not covered in the media

Figure 1. Industry distribution of media coverage. The histogram shows the industry dis-
tribution of stocks covered by the media and of stocks not covered by the media. The one-digit SIC
classification is as follows—0: agriculture, forestry, and fishing; 1: mining and construction; 2: man-
ufacturing (consumer goods); 3: manufacturing (machinery and equipment); 4: transportation and
communications; 5: wholesale and retail; 6: finance; 7: business services; 8: health and education
services; 9: public administration.

Is media coverage biased toward some industries? If this were the case, any
cross-sectional return pattern we document could be a disguised industry effect.
Figure 1 graphs the industry distributions for the no- and high-coverage stocks,
and shows that they are virtually identical.10
Table II examines the determinants of media coverage in a regression set-
ting. The dependent variable is the circulation-weighted number of articles
published about a stock over a year.11 We employ the Fama-MacBeth (1973)
regression method. Because media coverage is persistent, we correct the stan-
dard errors for autocorrelation using the Newey-West (1987) procedure with
one lag. We find that firm size has an overwhelming effect on media coverage:
Large firms are much more likely to be covered. Controlling for size, firms with
high book-to-market ratios, that is, value stocks, are also more likely to be fea-
tured in the media. Stocks covered by analysts are less likely to be in the media.
This suggests that analyst coverage and media coverage are substitutes rather
than complements. We also find that, all else equal, stocks with high individ-
ual ownership are more likely to be featured in the media. Thus, to the extent
10
We repeated the analysis with finer, two-digit SIC codes, and the results are very similar.
11
We obtain qualitatively similar results when we carry out a univariate analysis of the relation
between media coverage and firm characteristics and a probit regression on media coverage. But
we note that if the size is not controlled for, the sign on the book-to-market ratio becomes negative.
This ref lects the fact that size is strongly positively related to media coverage and negatively
related to book-to-market in our sample.
 15406261, 2009, 5, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2009.01493.x by Sichuan University, Wiley Online Library on [06/03/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
Media Coverage and the Cross-section of Stock Returns 2031

Table II
Determinants of Media Coverage
This table reports Fama-Macbeth (1973) regression results on the determinants of media cover-
age. The dependent variable is the number of articles published about a stock in a given year.
Independent variables are defined in Table AI. t-statistics are based on standard errors adjusted
for autocorrelation using the Newey-West (1987) procedure with one lag. ∗ , ∗∗ , and ∗∗∗ indicate
statistical significance at the 10%, 5%, and 1% level, respectively.

Dependent Variable: Number of Articles

Size 1.084 1.081

(20.17)∗∗ (19.62)∗∗
Book-to-market 0.233 0.228
(12.06)∗∗ (11.98)∗∗
Analyst coverage −0.518 −0.51
(6.93)∗∗ (6.86)∗∗
Fraction of individual ownership 0.183 0.177
(3.79)∗∗ (3.77)∗∗
Analyst dispersion 0.223 0.212
(3.09)∗ (2.50)∗
Idiosyncratic volatility 42.364 42.668
(6.35)∗∗ (7.03)∗∗
Past year absolute return 0.009
−0.08
Past year return −0.081
−1.04
Constant −14.167 −14.117
(23.91)∗∗ (23.54)∗∗
Observations 13849.00 13849.00

R2 0.24 0.24

that analysts tend to cater to institutional investors’ information needs, the

media seems to cater to individuals, after accounting for firm size. Finally, both
analyst dispersion and idiosyncratic volatility are positively related to media
coverage. Past returns have little impact on the likelihood of media coverage
as both absolute and signed past returns are not significant in the estimation
results.

III. Media Coverage and the Cross-section of Stock Returns

This section focuses on the cross-sectional relation between media coverage
and stock returns. We first examine raw returns in univariate analysis, and
then examine abnormal returns to account for various risk factors.

A. Univariate Analysis
Table III reports average returns of stocks double-sorted by firm character-
istics and media coverage. We first sort stocks into terciles by various firm
characteristics, such as size. Terciles are used to ensure adequate sample size
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2032 The Journal of FinanceR

Table III
Media Coverage and Stock Returns: Univariate Comparisons
This table presents average monthly returns for stocks with no, low, and high newspaper coverage.
Average return numbers are in percentages. Each month, we divide our sample of firms into three
media-coverage portfolios: no coverage, low coverage, and high coverage. Media coverage is mea-
sured by the number of newspaper articles written about the company, and the median is used to
divide the covered stocks into low and high groups. We then compute the equal-weighted average
return of the three media coverage portfolios using individual stock returns in the next month.
We also compute the return difference for subsamples of firms sorted on size, book-to-market ra-
tio, current and past month returns, price, individual ownership, analyst coverage, illiquidity, and
turnover. These variables are defined in Table AI.

Average Monthly Return Average No. of Stocks

Media Coverage t-Statistics Media Coverage

for
No Low High No − High No − High No Low High

All stocks 1.35 1.11 0.96 0.39 2.13 1,430.08 284.82 245.40
Panel A: By Size

1 1.41 1.02 0.53 0.88 1.74 578.44 56.36 17.98

2 1.34 1.12 0.69 0.65 2.68 514.23 92.85 46.71
3 1.27 1.16 1.10 0.17 1.03 337.42 167.12 149.19
Panel B: By Book-to-Market

1 1.19 0.95 0.87 0.32 1.25 441.79 93.98 81.50

2 1.23 1.17 0.54 0.70 3.13 450.03 92.90 74.64
3 1.42 1.10 1.19 0.22 0.85 460.78 86.20 70.57
Panel C: By Past Month Return

1 1.43 0.98 0.85 0.58 2.29 474.54 93.31 76.78

2 1.25 0.89 0.91 0.34 1.73 461.16 97.56 82.13
3 1.09 1.07 0.64 0.44 2.19 467.33 93.25 78.77
Panel D: By Current Month Return

1 1.96 1.49 0.86 1.10 4.24 479.50 94.11 75.77

2 1.29 1.08 1.01 0.28 1.36 475.29 94.21 79.54
3 0.88 0.75 1.08 −0.20 −0.76 467.93 100.31 84.40
Panel E: By Price

1 1.01 0.53 −0.11 1.11 3.14 545.18 69.76 35.76

2 1.39 1.12 0.54 0.84 3.77 500.77 94.03 60.14
3 1.77 1.47 1.35 0.42 2.62 384.13 142.30 128.21

and diversification.12 Next we sort each characteristic-based tercile into three

media portfolios: no coverage, low coverage, and high coverage. Stocks with
no newspaper coverage are first identified; the remaining stocks are divided
into the low- and high-coverage groups using the median number of articles

12
Terciles 1 and 3 refer to the lowest and highest value of each characteristic, respectively.
 15406261, 2009, 5, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2009.01493.x by Sichuan University, Wiley Online Library on [06/03/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
Media Coverage and the Cross-section of Stock Returns 2033

published. The equal-weighed return of each portfolio during the following

month is then tabulated.13
The first row of Table III shows that unconditionally, the average monthly re-
turns for stocks with no-, low-, and high-media coverage are 1.35%, 1.11%, and
0.96%, respectively. The difference between the no- and high-coverage groups is
a statistically significant and economically meaningful 0.39% per month (4.8%
per year). Thus, sorting stocks on media coverage alone generates a significant
return differential in the cross-section, pointing to a return premium associ-
ated with no-coverage stocks. The double-sorts in Panels A–E control for firm
characteristics one at a time and generally support the unconditional result.
With only one exception, the return difference between no-coverage stocks and
high-coverage stocks is positive, and in most cases significant. Therefore, there
seems to be a pervasive no-coverage premium among stocks, even holding var-
ious firm characteristics constant.
Interestingly, Panel D of this table shows that the no-media premium is found
only among low current return (i.e., loser) stocks (tercile 1). This is consistent
with the finding in Chan (2003) that loser stocks with contemporaneous news
experience negative return drift and loser stocks without news tend to reverse
subsequently. Chan also finds no such drift nor reversal for winner stocks. This
suggests that our media effect could be related to the phenomena documented
by Chan (2003). We return to this point in much greater detail in Section IV
below when we explore the explanations of the media effect.

B. Multivariate Analysis
To examine the media effect controlling for risk factors, we form long–short
portfolios of stocks sorted by media coverage. Each month, we divide the stock
sample into no-media, low-media, and high-media coverage groups as before.
We then compute the return in the following month on a zero-investment portfo-
lio that longs the stocks with no media coverage and shorts the stocks with high
media coverage. Repeating this every month yields a time series of returns for
this zero-investment portfolio. The time-series returns are then regressed on
factors known to affect the cross-section of returns. We examine four different
factor models: the market model, the Fama-French (1993) three-factor model,
the Carhart (1997) four-factor model, and a five-factor model that includes the
Pastor-Stambaugh (2003) liquidity factor. The Pastor-Stambaugh liquidity fac-
tor controls for stocks’ exposure to the aggregate (market-wide) liquidity risk.
Stock-specific liquidity, such as bid-ask spread, is examined in detail in the
next section. If the return difference between no-coverage and high-coverage
stocks is fully explained by known factors, then the estimated alpha should be
insignificant.
Table IV reports the baseline result in this multivariate setting. The ta-
ble confirms the earlier univariate finding that there is a no-media return

13
Equal-weighted returns have been used in Chan (2003), Diether, Malloy, and Scherbina (2002),
and Kumar and Lee (2006), among others.
 15406261, 2009, 5, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2009.01493.x by Sichuan University, Wiley Online Library on [06/03/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
2034 The Journal of FinanceR

Table IV
Media-Related Trading Profits: Baseline Multivariate Results
This table examines the profitability of a trading strategy that longs stocks with no media coverage
and shorts stocks with high media coverage. Each month, stocks are sorted according to the number
of newspaper articles published about them. A stock is considered to have no media coverage
if no article is published about the stock in a given month. A stock is considered to have high
coverage if the number of articles about it exceeds the medium in a given month. Both the long and
short positions are equally weighted, and held for 1 month after portfolio formation. Portfolios are
rebalanced monthly. The resulting time-series returns on the long–short portfolio are regressed
on widely accepted risk factors (defined in Table AI), and the results are reported. p-values are in
parentheses. ∗ , ∗∗ , and ∗∗∗ indicate statistical significance at the 10%, 5%, and 1% level, respectively.

Model 1: Model 2: Model 3: Model 4:

CAPM FF Three-Factor Carhart Four-Factor PS Liquidity

Panel A: Long No-Media Stocks, Short High-Media Stocks

Mkt-rf −0.1434∗∗∗ −0.1182∗∗∗ −0.0910∗∗∗ −0.0918∗∗∗

(0.0002) (0.0004) (0.0053) (0.0050)
SMB – 0.3719∗∗∗ 0.3565∗∗∗ 0.3602∗∗∗
(0.0000) (0.0000) (0.0000)
HML – 0.1580∗∗∗ 0.1732∗∗∗ 0.1620∗∗∗
(0.0004) (0.0001) (0.0003)
UMD – – 0.0767∗∗∗ 0.0939∗∗∗
(0.0006) (0.0017)
LIQ – – – −2.5419
(0.3783)
Intercept 0.0045∗∗ 0.0035∗∗∗ 0.0024∗∗ 0.0023∗
(0.0110) (0.0051) (0.0471) (0.0611)
Observations 119 119 119 119
R2 0.11 0.58 0.62 0.62

Panel B: Alphas for No-Media Coverage Stocks

Intercept 0.0065∗∗∗ 0.0024 0.0042∗∗∗ 0.0039∗∗∗

(0.0072) (0.1020) (0.0023) (0.0047)

Panel C: Alphas for High-Media Coverage Stocks

Intercept 0.002 −0.0011 0.0018 0.0016

(0.3263) (0.4749) (0.1263) (0.1859)

premium even after controlling for market, size, book-to-market, momentum,

and liquidity factors. However, the factor models do explain a significant portion
of the premium, as the alphas successively decrease when factors are added.
The alpha in the five-factor model is 23 basis points per month, compared to
45 basis points in the market model, indicating that about half of the alpha
relative to the market model is absorbed by commonly known risk factors.14

14
We also repeat the analysis splitting our sample period into two subperiods, 1993 to 1997 and
1998 to 2002. The results are qualitatively similar in both subperiods (no-coverage stocks generate
significant positive alphas relative to high-coverage stocks), albeit statistically stronger in the first
 15406261, 2009, 5, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2009.01493.x by Sichuan University, Wiley Online Library on [06/03/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
Media Coverage and the Cross-section of Stock Returns 2035

The loadings on the risk factors are interesting. The positive and significant
coefficients on the size factor (SMB), the book-to-market factor (HML), and the
momentum factor (UMD) indicate that the zero-investment strategy of buying
no-media coverage stocks and shorting high-media coverage stocks has a posi-
tive exposure to small stocks, value stocks, and momentum stocks. The strategy
has a negative exposure to overall market movements, as indicated by the neg-
ative sign on the market factor. This is because our portfolio strategy is zero
investment, and the stocks sold short (those with high media coverage) tend
to co-move more with the market than stocks held long (those with no media
coverage).
Panels B and C of Table IV investigate the long (no-coverage stocks) and
short (high-coverage stocks) legs of the portfolio separately. The results here
show that the media effect is primarily driven by the long positions in the
stocks without media coverage. High-coverage stocks, in contrast, do not exhibit
significant alphas.15 This asymmetry indicates that stocks neglected by the
media earn a significant return premium, and this causes the observed media
effect.
Interestingly, this asymmetry also suggests that the media effect is unlikely
to be caused by individual (or generally unsophisticated) investors’ buying of
attention-grabbing stocks. Barber and Odean (2008) document that individuals
exert buying pressure on attention-grabbing stocks such as those in the news.
These stocks subsequently underperform. If the media effect is caused by this
phenomenon, we expect the long–short strategy alpha to come from the short
leg (high-coverage stocks). But this is not the case. On the contrary, the media
effect stems from those stocks in oblivion that earn abnormally high returns.
We will examine the cause of this in detail in Section IV below.
We also use the characteristic-based benchmark method in Daniel et al.
(1997) (DGTW) to check our results. The benchmark returns are based on portfo-
lios matched on size, book-to-market, and momentum.16 In unreported analysis,
we find that the difference in benchmark-adjusted returns between no-coverage
stocks and high-coverage stocks is 29 basis points per month (t-statistic = 3.34).
In addition, it is the no-coverage stocks that continue to exhibit positive and
significant alphas: The DGTW benchmark-adjusted returns are 23 basis points
per month (t-statistic = 6.63) for these stocks, and −6 basis points (t-statistic =

subperiod. Lower statistical significance in the second sub-period seems to be caused by a higher
overall return volatility.
15
The fact that both the long and short legs of the portfolios display positive alphas—though
not significantly so for high-media coverage stocks—reflects both the equal-weighting scheme
used to compute portfolio returns and the limited number of stocks in our sample, which consists
mostly of NYSE stocks. Indeed, we find that stocks with a low media coverage (the remaining
middle-portfolio stocks not used in the portfolio strategy) also exhibit a positive alpha on average:
It equals, respectively, 0.0038, 0.0001, 0.0022, and 0.0019 in models 1–4. Importantly, alphas are
monotonically decreasing in the amount of media coverage, which is consistent with the Merton
hypothesis.
16
We thank the authors of DGTW (1997) for making the benchmark data available via Russ
Wermer’s website at http://www.smith.umd.edu/faculty/rwermers/ftpsite/Dgtw/coverpage.htm.
 15406261, 2009, 5, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2009.01493.x by Sichuan University, Wiley Online Library on [06/03/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
2036 The Journal of FinanceR

Table V
Media-Related Trading Profits by Firm Characteristics
This table examines the profitability of a media-based trading strategy in subsamples of firms
sorted by various firm characteristics. Each month, stocks are sorted into three media coverage
portfolios: no coverage, low coverage, and high coverage. Stocks with no media coverage are first
identified, and then the remaining stocks are divided into low- and high-coverage groups by the
median number of newspaper articles published about that stock. The portfolio then goes long on the
stocks with no media coverage and short on stocks with high media coverage in the next month. The
long and short legs of the portfolio invest an equal amount in each underlying stock, and portfolio
weights are rebalanced monthly. Reported number are alphas from regressing the resulting time
series of zero-investment portfolio returns on the market factor, the Fama-French (1993) three-
factor, Carhart (1997) four-factor, and Pastor-Stambaugh (2003) liquidity factor models. p-values
are in parentheses. ∗ , ∗∗ , and ∗∗∗ indicate statistical significance at the 10%, 5%, and 1% level,
respectively.

CAPM FF Three-Factor Carhart Four-Factor PS Liquidity

Panel A: By Firm Size

Small
0.0103∗∗ 0.0108∗∗ 0.0082 0.0076
(0.0375) (0.0349) (0.1141) (0.1443)
Medium
0.0069∗∗∗ 0.0064∗∗∗ 0.0045∗ 0.0043∗
(0.0046) (0.0094) (0.0651) (0.0802)
Large
0.0023 0.0014 −0.0004 −0.0006
(0.1418) (0.3771) (0.7651) (0.6815)
Panel B: By Book-to-Market
Low
0.0078∗∗∗ 0.0065∗∗∗ 0.0048∗∗ 0.0046∗∗
(0.0003) (0.0010) (0.0128) (0.0181)
Medium
0.0035 0.0033∗ 0.0017 0.0016
(0.1223) (0.0988) (0.4005) (0.4132)
High
0.0047∗ 0.0039∗ 0.0025 0.0027
(0.0774) (0.0750) (0.2510) (0.2246)
Panel C: By Past 12-Month Momentum
Low
0.0064∗∗ 0.0061∗∗ 0.0040∗ 0.0043∗
(0.0196) (0.0150) (0.0997) (0.0780)
Medium
0.0056∗∗∗ 0.0045∗∗∗ 0.0044∗∗∗ 0.0040∗∗∗
(0.0092) (0.0026) (0.0044) (0.0092)
High
0.0050∗∗ 0.0037∗ 0.0040∗ 0.0035
(0.0403) (0.0868) (0.0769) (0.1181)

−0.33) for high-media stocks. These results are consistent with the regression
results.
Table V examines the media effect in subsamples sorted by size, book-to-
market (B/M), and 12-month return momentum. In this analysis, within each
 15406261, 2009, 5, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2009.01493.x by Sichuan University, Wiley Online Library on [06/03/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
Media Coverage and the Cross-section of Stock Returns 2037

tercile, the relevant characteristic is controlled for in two ways: by sorting and
by an explicit regression control. The goal of this analysis is to identify the
subsets of stocks in which the media effect is the strongest. Table V shows that
the media effect is concentrated among small stocks (Panel A) and low B/M
stocks (Panel B). It is also stronger among stocks with low past returns (Panel
C), but the difference across the momentum terciles is not as dramatic as that
in the univariate results in Panel D of Table III.
The fact that the media effect is strongest among small stocks raises the con-
cern that the media effect is spurious, as many documented return anomalies
occur among small firms. Two specific concerns are that (1) the media effect
could be driven by bid-ask bounce, which affects the measurement of small
stock returns, and (2) the media effect could be a misnamed size effect. Re-
garding the first concern, we note that our sample consists mainly of NYSE
stocks, which are far larger and more liquid than the overall CRSP universe.17
In addition, we have dropped stocks with prices below $5, making it less likely
that the no-media premium is caused by bid-ask bounce among small stocks.
Furthermore, in robustness checks below, we compute returns from bid-ask
midpoints and find results that are quantitatively and qualitatively similar to
the baseline. Regarding the second concern, it is important to interpret the test
in Table V correctly. If the media coverage sort were simply a disguised sort
on size, then the media effect should disappear within each size tercile. In our
experiment, stocks within each size tercile are relatively homogenous in size
but differ significantly in media coverage. We find a strong media effect among
the smallest set of stocks and no effect among the largest set. Because smaller
stocks as a group tend to have poorer information dissemination compared to
larger stocks, the asymmetry between small and large stocks suggests that mass
media plays a bigger role when information dissemination is otherwise poor; for
large stocks, which already have many information channels, the role of mass
media is limited.

C. Robustness
In this section, we conduct a number of robustness checks on the baseline re-
sults presented in Tables IV and V. In particular, we try to alleviate the concern
that the media effect could be driven by (a) bid-ask bounce, (b) postearnings an-
nouncement drift, (c) delisting bias, (d) IPO underperformance, and (e) sector
bias.
Monthly returns based on closing prices are used in the baseline analysis.
This could lead to a bias induced by bid-ask bounce if some stocks are thinly
traded. This is a relevant concern as we find that the media effect is more

17
For example, the mean (median) equity market capitalization is $4.7B ($947M) for NYSE
stocks, compared to $1.9B ($198M) for all CRSP stocks. The mean (median) monthly trading volume
is $352M ($59M) for NYSE stocks compared to $223M ($14M) for all CRSP stocks. The mean
(median) bid-ask spread using monthly closing data is 1.83% (1.43%) for NYSE stocks compared
to 2.83% (1.96%) for all CRSP stocks.
 15406261, 2009, 5, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2009.01493.x by Sichuan University, Wiley Online Library on [06/03/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
2038 The Journal of FinanceR

Table VI
Robustness Checks
This table reports returns of a long–short portfolio that goes long on stocks with no media coverage
in the previous month and goes short on stocks with high (above median) media coverage in the
previous month, after applying various data screens. The long and short legs of the portfolio invest
an equal amount in each underlying stock. p-values are in parentheses. ∗ , ∗∗ , and ∗∗∗ indicate
statistical significance at the 10%, 5%, and 1% level, respectively.

Model 1: Model 2: FF Model 3: Carhart Model 4: PS

CAPM Three-Factor Four-Factor Liquidity Factor

Panel A: Returns Based on Bid-Ask Midpoints

Intercept 0.0051∗∗∗ 0.0043∗∗∗ 0.0030∗∗ 0.0029∗∗

(0.0051) (0.0010) (0.0159) (0.0195)

Panel B: Excluding Earnings Announcements

Intercept 0.0056∗∗∗ 0.0049∗∗∗ 0.0046∗∗∗ 0.0046∗∗∗

(0.0017) (0.0035) (0.0082) (0.0080)

Panel C: Excluding IPOs

Intercept 0.0046∗∗∗ 0.0033∗∗∗ 0.0021∗ 0.002

(0.0086) (0.0081) (0.0789) (0.1036)

Panel D: With Corrected Delisting Returns

Intercept 0.0045∗∗ 0.0035∗∗∗ 0.0024∗∗ 0.0023∗

(0.0109) (0.0047) (0.0470) (0.0607)

Panel E: Applying All Three Filters (B–D)

Intercept 0.0053∗∗∗ 0.0044∗∗ 0.0039∗∗ 0.0039∗∗

(0.0038) (0.0133) (0.0332) (0.0343)

Panel F: Excluding Tech-Sector Stocks

Intercept 0.0038∗∗ 0.0035∗∗∗ 0.0031∗∗∗ 0.0031∗∗∗

(0.0264) (0.0022) (0.0086) (0.0097)

concentrated among smaller stocks. To check this possibility, we repeat our

analysis using monthly returns based on bid-ask midpoints, rather than trans-
action prices. Panel A of Table VI shows that results based on bid-ask midpoints
are similar to and indeed slightly stronger than the baseline results. Thus, we
conclude that our result is not driven by microstructure issues such as bid-ask
bounce.
Postearnings announcement drift, IPO underperformance, and delisting bias
are well-documented return anomalies and hence we need to check that the me-
dia effect is not driven by them. These anomalies could lead to a spurious media
effect if media coverage is more intense for firms announcing earnings, for IPO
stocks, or for stocks going through delisting. For example, if media coverage is
 15406261, 2009, 5, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2009.01493.x by Sichuan University, Wiley Online Library on [06/03/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
Media Coverage and the Cross-section of Stock Returns 2039

biased toward bad earnings news, or if returns tend to drift more following bad
earnings news compared to good earnings news,18 then indeed a strategy that
longs no-coverage stocks and shorts high-coverage stocks will generate a pos-
itive alpha. A no-coverage premium would also result if high-coverage stocks
are disproportionally represented by IPO stocks that subsequently underper-
form. Finally, if media has a tendency to cover firms going through delisting for
negative reasons (for example, liquidation or takeover), then the delisting bias
reported by Shumway (1997) could also lead to a spurious media effect.19
To check that our results are not driven by postearnings announcement drift
or IPO underperformance, we exclude all potentially earnings-related media
coverage20 and all IPO stocks. To check that our results are not driven by delist-
ing bias, we follow Shumway (1997) and replace all missing delisting returns
with −30% for delisting codes of 500 or 520–584. Results for these robustness
checks are reported in Panels B, C, and D of Table VI, respectively, and they
show that the media effect is robust to these alternative specifications. When
all three filters are simultaneously applied (Panel E), the results remain qual-
itatively and quantitatively similar to the baseline.
Finally, we check that our results are not driven by the tech sector, which ex-
perienced a dramatic rise and fall during our sample period. For this purpose,
we exclude all tech-sector stocks from our sample.21 Panel F shows that the me-
dia effect is robust and strong in the remaining nontech sector. Thus, it is not
a tech-sector phenomenon. We also investigate whether the return difference
between high- and no-coverage stocks is simply driven by differences in oper-
ating performance. We fail to find support for this conjecture (unreported).22
We conclude that the media effect is not caused by a number of known return
anomalies.

IV. Explaining the Media Effect

In this section, we discuss three possible causes of the media effect: continu-
ations and reversals in returns, lack of liquidity, and information frictions.

18
Both of these conjectures, however, are not borne by the data. Hayn (1995) finds that returns
are more sensitive to positive earnings surprises than to negative ones. Moreover, in our sample,
stocks in the media are just as likely to experience positive returns as negative returns in the
month contemporaneous with media coverage, so mass media does not seem to exhibit a bias.
19
Shumway (1997) reports that the CRSP database has a systematic upward bias on returns of
certain delisted stocks. This is because negative delisting returns are coded as missing when the
delisting is due to performance reasons.
20
We consider any media coverage in months that a firm reports earnings as potentially earn-
ings related. Excluding these articles reduces our media sample by about 40%. Thus, earnings
announcements seem to account for a large proportion of routine coverage.
21
We use the tech/non-tech classification based on SIC codes and PERMNOs in Loughran and
Ritter (2004).
22
We examine two operational performance measures: return on equity, defined as income before
extraordinary items over book equity, and return on assets, defined as income before extraordinary
items over total assets. We compare both levels and changes of these measures for firms with and
without media coverage, and fail to find significant differences.
 15406261, 2009, 5, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2009.01493.x by Sichuan University, Wiley Online Library on [06/03/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
2040 The Journal of FinanceR

A. Return Continuations and Reversals

One possibility is that the media effect we document is a transient phe-
nomenon caused by short-term return continuations or reversals. Chan (2003)
documents that stocks with low returns during months when firms have head-
line news (he calls these stocks “news losers”) experience negative return
drift for over 12 months.23 In contrast, “no-news losers” (i.e., stocks that have
low returns during months without accompanying news) see their returns
reverse.24
These patterns could generate the result that no-coverage stocks have higher
returns than high-coverage stocks, to the extent that no-coverage stocks cor-
respond to “no news stocks” and high-coverage stocks to “news stocks.” In this
case, our long–short strategy will be equivalent to buying no-news stocks and
shorting news stocks, and given the reversal among no-news stocks (losers in
particular) and drift among news stocks (losers in particular), such a strategy
would generate a positive alpha, consistent with our results. Since the reversal
and drift effects documented by Chan (2003) are concentrated among losers,
there is a concern that our results represent the same reversal/drift patterns,
especially since Panel D of Table III suggests that the media effect is stronger
among losers.25
Relating to Chan (2003), we first note that “news” and “coverage” are in fact
markedly different. While 92% of our high-coverage stocks have contemporane-
ous headline news, so do 76% of our no-coverage stocks.26 Thus, many companies
with news continue to be neglected by mass media. This means that equating
the new/no-news classification in Chan (2003) and the coverage/no-coverage
classification in this paper is inaccurate.
We now investigate whether the media effect is due to either (a) negative
return drift among high-coverage losers or (b) return reversal of no-coverage
losers. Scenario (a) can be ruled out because the alpha on the long–short port-
folio stems primarily from the long leg (no-coverage stocks). If the media effect
were caused by negative drift among high-coverage losers, then the alpha of the
long–short portfolio should primarily come from the short leg (high-coverage

23
There is no strong drift, however, for “news winners.” Drift among “news losers” is consistent
with the “bad news travels slowly” idea in Hong, Lim, and Stein (2000).
24
Chan finds no reversal among “no-news winners.” In other words, the drift and reversal effects
in Chan (2003) are both concentrated among losers.
25
However we note that once multiple risk factors are controlled for, Panel C in Table V shows
that the no-media premium exists in winners as well as losers, albeit slightly stronger among
losers.
26
We thank Wesley Chan for making some of his data available to us for comparison. Further
analysis reveals that Chan’s media data have overall more “hits” per stock than our data. This is due
to a larger set of sources used by Chan, which include in particular the Dow Jones Newswire service.
Interestingly, Chan’s data cover disproportionally more loser stocks, small stocks, and stocks with
earnings news. Statistics pertaining to these comparisons are available from this article’s Internet
Appendix available at http://www.afajof.org/supplements.asp.
 15406261, 2009, 5, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2009.01493.x by Sichuan University, Wiley Online Library on [06/03/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
Media Coverage and the Cross-section of Stock Returns 2041

Table VII
Different Formation Periods and Holding Periods
This table reports mean returns for the long–short portfolio that goes long on stocks with no media
coverage over the past N months (the “formation period”) and short on stocks with high (above-
median) media coverage over the past N months (N = 1, 3, 6). Average monthly alphas for various
holding horizons between 1 month and 12 months are reported (the “holding period”). ∗ , ∗∗ , and ∗∗∗
indicate statistical significance at the 10%, 5%, and 1% level, respectively.

Holding Time-Series CAPM FF Three- Carhart Four- PS Five-

Period Mean Alpha Factor Alpha Factor Alpha Factor Alpha

Panel A: Formation Period = 1 Month

1 month 0.0039∗∗ 0.0045∗∗ 0.0035∗∗∗ 0.0024∗∗ 0.0023∗

3 months 0.0033∗ 0.0039∗∗ 0.0028∗∗ 0.0016 0.0015
6 months 0.003 0.0036∗∗ 0.0026∗∗ 0.0013 0.0012
9 months 0.0026 0.0033∗ 0.0024∗∗ 0.0012 0.0011
12 months 0.0027 0.0034∗ 0.0025∗∗ 0.0013 0.0011

Panel B: Formation Period = 3 Months

1 month 0.0036∗∗ 0.0042∗∗ 0.0033∗∗∗ 0.0022∗∗ 0.0020∗

3 months 0.0032∗ 0.0038∗∗ 0.0030∗∗∗ 0.0017 0.0015
6 months 0.0029 0.0035∗∗ 0.0028∗∗ 0.0016 0.0015
9 months 0.0028 0.0035∗∗ 0.0029∗∗∗ 0.0017∗ 0.0015
12 months 0.0028 0.0034∗ 0.0030∗∗∗ 0.0017∗ 0.0016

Panel C: Formation Period = 6 Months

1 month 0.0032∗ 0.0038∗∗ 0.0032∗∗∗ 0.0022∗∗ 0.0021∗∗

3 months 0.0029 0.0034∗∗ 0.0030∗∗∗ 0.0021∗∗ 0.0020∗∗
6 months 0.0027 0.0033∗ 0.0030∗∗∗ 0.0021∗∗ 0.0020∗
9 months 0.0027 0.0033∗ 0.0032∗∗∗ 0.0022∗∗ 0.0021∗∗
12 months 0.0028 0.0035∗ 0.0033∗∗∗ 0.0022∗∗ 0.0021∗

stocks) of the strategy. But Table IV shows that alphas are indistinguishable
from zero among high-coverage stocks.27
To evaluate the possibility that the media effect is caused by return reversals
among no-coverage stocks, we examine the effect’s horizon. The idea is as fol-
lows. Chan (2003) documents that the reversal pattern among no-news losers is
short-lived: Among stocks priced above $5 (similar to our sample), the reversal
is very weak and only found in the first month after portfolio formation. Thus, if
reversal explains our result, we expect it to be short-lived as well. Accordingly,
we examine the alphas of our long–short strategy for postformation holding
periods ranging from 1 to 12 months and report the findings in Table VII. We
use the calendar-time overlapping portfolio approach of Jegadeesh and Titman
27
Table IV shows that high coverage stocks actually exhibit positive alphas, although they are
generally insignificant. The fact that both the long and short legs of the strategy exhibit positive
alphas in terms of magnitude is a result of equal weighting and our sample stocks constituting only
a subsample of the CRSP universe. If Chan’s results explain ours, however, we’d expect negative
alphas among high-coverage stocks, which is not the case.
 15406261, 2009, 5, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2009.01493.x by Sichuan University, Wiley Online Library on [06/03/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
2042 The Journal of FinanceR

0.003

0.0025

0.002

0.0015

0.001
Alpha

0.0005

-0.0005

-0.001

-0.0015
1 2 3 4 5 6 7 8 9 10 11 12
Months after portfolio formation

No-coverage stocks, 1m formation period High-coverage stocks, 1m formation period

No-coverage stocks, 3m formation period High-coverage stocks, 3m formation period
No-coverage stocks, 6m formation period High-coverage stocks, 6m formation period

Figure 2. Horizon analysis of the media effect. Fama–French three-factor adjusted alphas
for no- and high-coverage stocks are displayed for various formation and holding periods. Stocks
are assigned to portfolios based on their coverage in the media over the past 1, 3, or 6 months. The
portfolio returns are plotted for holding horizons ranging from 1 month to 12 months.

(1993) to calculate postformation returns.28 For brevity, only select holding pe-
riod results are tabulated. We form portfolios based on 1-month media coverage
(Panel A, as in our baseline analysis), as well as 3- and 6-month media coverage
(Panels B and C).
This table shows that the Fama-French three-factor alpha of our long–short
strategy persists far beyond the 1-month horizon (three-factor alphas are com-
parable to Chan (2003) who adjusts for size and book-to-market ratios. Our
conclusion does not change when four-factor alphas are used). Corroborating
this conclusion, Figure 2 graphs the alphas of the long and short legs sepa-
rately, and indicates not only that the alphas on the long–short strategy stem
from the long (no-coverage) leg, as we have noted above, but also that they are
remarkably stable. These patterns suggest that our results are not driven by
short-term reversals among no-coverage stocks.
In addition, both Table VII and Figure 2 also show that the media effect is
more stable when a longer formation period is used. In particular, while the
momentum factor reduces the alpha’s significance in the 1-month formation

28
This approach has been widely adopted in the finance literature. See, among others, Fama
(1998), Diether, Malloy, and Scherbina (2002), and Chan (2003). Fama (1998) indicates that “The
time-series variation of the monthly abnormal return on this portfolio accurately captures the
effects of the correlation of returns across event stocks missed by the model for expected returns.
The mean and variance of the time series of abnormal portfolio returns can be used to test the
average monthly response of the prices of event stocks . . . following the event” (p. 295).
 15406261, 2009, 5, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2009.01493.x by Sichuan University, Wiley Online Library on [06/03/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
Media Coverage and the Cross-section of Stock Returns 2043

case (Panel A, baseline), it remains stable and strong 12 months postformation

with four-factor adjustments when the longer formation period of 6 months is
used.
In summary, the results in this section suggest that the media effect is not
caused by short-term reversal and continuation patterns widely discussed in
the literature and documented in Chan (2003). Instead, it is a stable cross-
sectional return difference the cause of which is examined further below. We
also show that “news” and “coverage” are different, as many stocks with news
remain neglected by the media (as do many stocks without news).

B. The “Impediments to Trade” Hypothesis

The rational agent framework offers two explanations for the cross-sectional
return differential we document.29 If the media effect represents an arbitrage
opportunity, it can only persist if large impediments prevent rational agents
from trading on it. We call this the “impediments-to-trade” or “illiquidity” hy-
pothesis. Alternatively, the return differential may not ref lect a mispricing but
a fair compensation for risks not captured by standard factors. We examine
these two explanations in turn.
To test the impediments-to-trade hypothesis, we examine its cross-sectional
predictions. If impediments to trade explain the media effect, then the media-
based abnormal profits should be concentrated among the most illiquid stocks.
In Table VIII, we sort stocks into groups based on various liquidity proxies and
report the long–short alphas for each group. We examine four liquidity proxies:
the Amihud (2002) illiquidity ratio, bid-ask spread, dollar trading volume, and
price.
The results in Table VIII provide mixed evidence. Sorting stocks by bid-ask
spread (Panel B) provides the strongest support for the illiquidity hypothesis:
This panel shows that the media effect is strongest among stocks with the high-
est bid-ask spread. Sorting by price (Panel D) results in significant alphas in all
three price ranges, but the magnitude of the media effect is the largest among
low-priced stocks, consistent with the illiquidity hypothesis. The implications
of sorts by the Amihud illiquidity ratio and daily trading volume are less clear.
For both measures, we find that the media effect is most pronounced among
stocks with a medium level of liquidity; in fact, the effect actually disappears
among the most illiquid stocks by these measures, when the theory suggests
that it should be the strongest.
We can estimate how much liquidity is needed to dissipate the alpha as an
additional check on the illiquidity hypothesis. The Amihud ratio, calculated as
a stock’s absolute daily return divided by its daily trading volume (scaled by
106 ), is a price impact measure. For stocks that exhibit the strongest media
effect (the medium group in Panel A), the average value of this ratio is 0.016,

29
Alternatively, the media effect could be driven by behavioral stories. We do not investigate this
class of explanations formally in this paper. We note, however, in Section III B that it is unlikely
to be caused by attention-induced buying pressure as in Barber and Odean (2008).
 15406261, 2009, 5, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2009.01493.x by Sichuan University, Wiley Online Library on [06/03/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
2044 The Journal of FinanceR

Table VIII
Illiquidity and the Media Effect
This table examines the profitability of a media-based trading strategy in subsamples of firms
sorted by various liquidity measures. Monthly alphas from various factor models of a long–short
strategy that goes long no-coverage stocks and short high-coverage stocks in the previous month are
reported. Equal weights are used in each leg, and portfolios are rebalanced monthly. The liquidity
measures are defined in Table AI. p-values are in parentheses. ∗ , ∗∗ , and ∗∗∗ indicate statistical
significance at the 10%, 5%, and 1% level, respectively.

CAPM FF Three-Factor Carhart Four-Factor PS Liquidity

Panel A: By Amihud’s (2002) Illiquidity Ratio

Low
0.0025 0.0016 −0.0004 −0.0005
(0.1162) (0.3202) (0.7609) (0.7281)
Medium
0.0113∗∗∗ 0.0119∗∗∗ 0.0097∗∗∗ 0.0093∗∗∗
(0.0001) (0.0000) (0.0007) (0.0012)
High
0.0046 0.0035 0.0021 0.0022
(0.3084) (0.4574) (0.6603) (0.6477)
Panel B: By Bid-Ask Spread

Low
0.0001 −0.001 −0.0012 −0.0012
(0.9433) (0.5113) (0.4694) (0.4781)
Medium
0.0096∗∗∗ 0.0084∗∗∗ 0.0074∗∗∗ 0.0071∗∗∗
(0.0000) (0.0000) (0.0003) (0.0005)
High
0.0098∗∗∗ 0.0096∗∗∗ 0.0086∗∗∗ 0.0095∗∗∗
(0.0010) (0.0009) (0.0039) (0.0010)

Panel C: By Dollar Trading Volume

Low
0.0063 0.0089∗ 0.0066 0.0056
(0.1815) (0.0641) (0.1802) (0.2494)
Medium
0.0090∗∗∗ 0.0084∗∗∗ 0.0070∗∗ 0.0073∗∗
(0.0035) (0.0077) (0.0278) (0.0240)
High
0.0047∗∗ 0.0041∗∗ 0.0023 0.0022
(0.0129) (0.0243) (0.1805) (0.2056)
Panel D: By Price

Low
0.0128∗∗∗ 0.0132∗∗∗ 0.0099∗∗∗ 0.0101∗∗∗
(0.0001) (0.0001) (0.0015) (0.0014)
Medium
0.0090∗∗∗ 0.0083∗∗∗ 0.0054∗∗∗ 0.0053∗∗∗
(0.0001) (0.0002) (0.0065) (0.0084)
High
0.0045∗∗∗ 0.0035∗∗∗ 0.0024∗ 0.0023∗
(0.0049) (0.0067) (0.0595) (0.0747)
 15406261, 2009, 5, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2009.01493.x by Sichuan University, Wiley Online Library on [06/03/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
Media Coverage and the Cross-section of Stock Returns 2045

meaning that a $1M trade triggers a 1.6% price impact. Given a four-factor
alpha of 0.98% in this group, it would take a trade of 0.98%/1.6% = $0.61M
to eliminate the profit over a single day. This is a large amount according to
common classifications of “large” and “small” trades.30 In addition, Panel C
shows that the media effect is strongest among stocks with a medium level
of trading volume. The average daily trading volume is about $2M for these
stocks, which is equal to the median daily volume among NYSE stocks. These
numbers suggest that the market is deep enough to support arbitrage trades,
thus casting some doubt on whether impediments to trade explain the media
effect in practice.

C. The Investor Recognition Hypothesis

Merton (1987) offers an alternative explanation to the media effect within
the rational agent paradigm. He models informationally incomplete markets
in which investors only know about a subset of the available stocks. In such mar-
kets, stocks that are recognized by fewer investors need to offer higher returns
to compensate their holders for being imperfectly diversified. This hypothesis,
known as the “investor recognition hypothesis,” has particular relevance to the
media effect. Mass media, by reaching a broad audience, can increase the degree
of investor recognition of a stock (even if it does not provide genuine news).
If media coverage improves investor recognition, then its effect should be
stronger among stocks that otherwise have a lower degree of recognition. We
test this hypothesis by sorting stocks on variables that ref lect the degree of
information incompleteness. Our information proxies include analyst coverage
and the fraction of individual ownership. We conjecture that low analyst cover-
age and a high fraction of individual ownership characterize stocks with poor
information dissemination, so we expect the media effect to be particularly
strong among these stocks. In addition, in Merton’s (1987) framework, firms’
idiosyncratic risk is priced because of the imperfect diversification that stems
from a lack of investor recognition. Firms with higher idiosyncratic volatility
should offer a return premium to compensate shareholders for the undiver-
sified risk they impose. This suggests two additional proxies that indicate the
cost of poor investor recognition: idiosyncratic volatility and the ratio of idiosyn-
cratic volatility to the number of shareholders (obtained from 13f filings). The
former measures the amount of idiosyncratic risk borne by investors due to im-
perfect diversification; the latter measures the same amount on a per-investor
basis. Following Ang et al. (2006), we estimate firms’ idiosyncratic volatility as
the standard deviation of daily abnormal stock returns relative to the Fama-
French three-factor model. If media coverage increases investor recognition and
improves diversification, its effect should be stronger among firms with higher
idiosyncratic volatility and higher idiosyncratic volatility per shareholder.
Table IX reports the media effect among stocks sorted by our information
proxies. The results here provide broad support for the investor recognition
30
For example, Hvidkjaer (2006) suggests $3,400, $4,800, $7,300, $10,300, and $16,000 as cutoffs
for “small trades” for NYSE/AMEX quintiles.
 15406261, 2009, 5, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2009.01493.x by Sichuan University, Wiley Online Library on [06/03/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
2046 The Journal of FinanceR

Table IX
Investor Recognition and the Media Effect
This table examines the profitability of a media-based trading strategy in firms sorted by investor
recognition. Monthly alphas from various factor models of a long–short strategy that goes long no-
coverage stocks and short high-coverage stocks in the previous month are reported. Equal weights
are used in each leg, and portfolios are rebalanced monthly. The investor recognition measures are
defined in Table AI. p-values are in parentheses. ∗ , ∗∗ , and ∗∗∗ indicate statistical significance at
the 10%, 5%, and 1% level, respectively.

CAPM FF Three-Factor Carhart Four-Factor PS Liquidity

Panel A: By Analyst Coverage

No
0.0069 0.0072 0.0078∗ 0.0082∗
(0.1142) (0.1007) (0.0866) (0.0748)
Low
0.0081∗∗∗ 0.0077∗∗∗ 0.0070∗∗∗ 0.0067∗∗∗
(0.0001) (0.0003) (0.0014) (0.0023)
High
0.0015 −0.0001 −0.0015 −0.0018
(0.4048) (0.9701) (0.3639) (0.2736)

Panel B: By the Fraction of Individual Ownership

Low
0.0025 0.0011 0.0001 0
(0.2121) (0.4586) (0.9371) (0.9997)
Medium
0.0061∗∗∗ 0.0042∗∗ 0.0024 0.0021
(0.0078) (0.0200) (0.1629) (0.2383)
High
0.0089∗∗∗ 0.0101∗∗∗ 0.0094∗∗∗ 0.0093∗∗∗
(0.0014) (0.0001) (0.0006) (0.0008)

Panel C: By Idiosyncratic Volatility

Low
0.0000 −0.0002 0.0002 0.0008
(0.9984) (0.8557) (0.8637) (0.5644)
Medium
0.0040∗∗ 0.0022 0.0016 0.0015
(0.0349) (0.1324) (0.2959) (0.3205)
High
0.0096∗∗∗ 0.0090∗∗∗ 0.0060∗∗ 0.0062∗∗
(0.0018) (0.0034) (0.0421) (0.0359)
Panel D: By Idiosyncratic Volatility per Investor

Low
0.0018 −0.0002 −0.0014 −0.0018
(0.2447) (0.8612) (0.2838) (0.1774)
Medium
0.0056∗ 0.0060∗ 0.0024 0.0025
(0.0654) (0.0538) (0.4172) (0.3913)
High
0.0108∗∗∗ 0.0112∗∗∗ 0.0087∗∗ 0.0077∗∗
(0.0029) (0.0029) (0.0199) (0.0362)
 15406261, 2009, 5, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2009.01493.x by Sichuan University, Wiley Online Library on [06/03/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
Media Coverage and the Cross-section of Stock Returns 2047

hypothesis. Panels A and B show that the media effect is stronger among stocks
with low analyst coverage and a high percentage of individual ownership. These
stocks are poorly covered by conventional information channels, and our results
suggest that media coverage plays a large incremental role. Panels C and D
show that the magnitude and significance of the media effect monotonically in-
crease with idiosyncratic volatility and idiosyncratic volatility per shareholder,
consistent with the predictions of the Merton model. The magnitude of the ef-
fect is about 1% per month among stocks with the highest measures (Panels C
and D), which is economically large.
In summary, the results in the last two sections provide support for both
the illiquidity hypothesis and the investor recognition hypothesis. However,
although illiquidity may explain why the media effect persists, it does not ex-
plain why it arises in the first place. We conclude that the media effect may
stem from media’s role in enhancing investor recognition, and that a lack of
adequate liquidity helps explain why it is not arbitraged away.

D. Media, Analyst Dispersion, and Idiosyncratic Volatility

An interesting question is whether the media effect is subsumed under re-
cently documented anomalies related to analyst dispersion and idiosyncratic
volatility. Diether et al. (2002) (DMS) document that stocks with high analyst
forecast dispersion exhibit low future returns. Building on Miller (1977), they
argue that forecast dispersion proxies for heterogeneity in investors’ opinions
and that under short-sales constraints, prices ref lect the most optimistic views.
Ang et al. (2006) document that stocks with high idiosyncratic volatility earn
low future returns. This is at odds with the notion that investors should be
rewarded for bearing risk that they cannot diversify away (e.g., Merton (1987)).
Furthermore, this effect cannot be explained by stocks’ exposure to systematic
volatility, leading the authors to conclude that the finding represents a puzzle.
We first note that the main finding in this paper is directionally consistent
with both results. Indeed, media coverage is positively related to both ana-
lyst dispersion and idiosyncratic volatility (Table V). Thus, our finding that
high-media coverage stocks earn lower returns is consistent with high ana-
lyst dispersion stocks and high idiosyncratic volatility stocks earning lower
returns.
To investigate whether the media effect is subsumed under either effect,
we double-sort stocks by media coverage and either analyst dispersion or id-
iosyncratic volatility, and compare the return differential along each dimension.
Table X reports the results. Excess returns for each group are calculated using
the DGTW characteristic-based benchmark method.
Double-sorting stocks by media coverage and idiosyncratic volatility (Panel A)
reveals that, controlling for idiosyncratic volatility (columns of the table), there
is a large no-media premium among high idiosyncratic volatility stocks, and
an insignificant premium in the other two idiosyncratic volatility groups. This
is consistent with results in Table IX that the media effect is concentrated in
the high idiosyncratic volatility group. Controlling for media coverage (rows of
 15406261, 2009, 5, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2009.01493.x by Sichuan University, Wiley Online Library on [06/03/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
2048 The Journal of FinanceR

Table X
Media Effect, Analyst Dispersion, and Idiosyncratic Volatility
This table examines whether the media effect is subsumed under the idiosyncratic volatility effect
(Ang et al. (2006)) and the analyst dispersion effect (Diether, Malloy, and Scherbina (2002)). We
double-sort stocks by media coverage and idiosyncratic volatility and analyst dispersion. Excess
returns are computed using the DGTW characteristic-based benchmark methods. t-statistics are
reported in parentheses.

Panel A: Double-Sort Media Coverage and Idiosyncratic Volatility

Low Medium High High − Low

Idiosyncratic Idiosyncratic Idiosyncratic Idiosyncratic
Volatility Volatility Volatility Volatility

No media 0.001 0.002 0.005 0.005

(1.569) (4.858) (7.614) (5.809)
Low media 0.002 0.001 0.003 0.001
(3.012) (0.404) (1.547) (0.435)
High media 0.001 0.002 −0.005 −0.006
(2.215) (1.907) (−2.405) (−3.713)
No − high media 0.001 0.000 0.010
(0.93) (0.423) (4.584)

Panel B: Double-Sort Media Coverage and Analyst Dispersion

Low Medium High High − Low

Dispersion Dispersion Dispersion Dispersion

No media 0.006 0.004 −0.001 −0.007

(11.662) (7.026) (−0.921) (−7.833)
Low media 0.003 0.004 −0.004 −0.007
(3.254) (4.006) (−2.816) (−4.197)
High media 0.003 0.001 −0.004 −0.006
(3.297) (1.219) (−2.557) (−4.039)
No − high media 0.004 0.003 0.003
(3.021) (2.115) (1.714)

the table), however, shows that the “puzzle” documented by Ang et al. (2006)—
that high idiosyncratic volatility stocks earn low returns—only obtains in the
high media coverage subset; the puzzle disappears or reverses in the other
media-coverage groups. In particular, high idiosyncratic stocks earn signifi-
cantly higher returns than low idiosyncratic volatility stocks as suggested by
Merton (1987) among no-coverage stocks.
These results first indicate that the media effect is not subsumed under the
idiosyncratic volatility effect: The no-coverage premium is always either pos-
itive or insignificant, while the idiosyncratic volatility effect reverses among
no-coverage stocks. Furthermore, the fact that among no-coverage stocks, high
idiosyncratic volatility stocks earn higher returns is consistent with the notion
that idiosyncratic risk should be priced (Merton (1987)). Thus, our evidence
suggests that the idiosyncratic volatility puzzle may be limited to a certain
subsets of stocks, for example, those with high media coverage and overall good
information dissemination.
 15406261, 2009, 5, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2009.01493.x by Sichuan University, Wiley Online Library on [06/03/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
Media Coverage and the Cross-section of Stock Returns 2049

Double-sorting by media coverage and analyst dispersion (Panel B) shows

that neither effect subsumes the other. Within each media coverage group, an
analyst dispersion effect obtains whereby stocks with higher dispersion earn
lower returns; similarly, within each analyst dispersion group, a media effect ob-
tains whereby no-coverage stocks earn a return premium. However, the analyst
dispersion effect appears considerably stronger in magnitude and significance
than that in the media effect. This is perhaps not entirely surprising given that
our sample consists of mainly large and liquid NYSE stocks. The incremental
role played by media is probably weaker than that in smaller stocks.

V. Conclusion
We examine the relation between media coverage and the cross-section of
stock returns. We find a significant return premium on stocks with no media
coverage: On average, stocks not featured in the media outperform stocks fre-
quently featured by over 0.20% per month, even after accounting for widely
accepted risk factors—market, size, book-to-market, momentum, and liquidity.
Moreover, this return premium is particularly large for small stocks and stocks
with high individual ownership, low analyst following, and high idiosyncratic
volatility. For these subsamples, stocks with no media coverage outperform
those with high media coverage by 0.65–1% per month. These figures are not
only statistically significant but also economically large.
We show that the media effect is robust to a number of well-known return
anomalies and is distinct from time-series patterns such as return reversals
and continuations. Instead, the phenomenon represents a stable cross-sectional
return differential among high-coverage stocks and low-coverage stocks that
could be explained by either illiquidity or investor recognition. We provide evi-
dence that supports both hypotheses. However, since illiquidity can only explain
the persistence of the phenomenon but not its cause, we conclude that the me-
dia effect stems from an information story such as Merton (1987), and the lack
of liquidity helps perpetuate the phenomenon.
We also show that the media effect is consistent with, but not subsumed un-
der, recently documented anomalies associated with analyst forecast dispersion
and idiosyncratic volatility. Recent research shows that stocks with high ana-
lyst forecast dispersion and high idiosyncratic volatility earn low returns. We
find that media coverage is positively related to both analyst forecast dispersion
and idiosyncratic volatility. Thus, our finding that high-media coverage stocks
earn lower returns is consistent with both results. Interestingly, if idiosyncratic
volatility is interpreted as an indication of the speed at which firm-specific in-
formation is incorporated into prices (e.g., Durnev, Morck, and Yeung (2004)),
then the positive correlation between media coverage and idiosyncratic volatil-
ity suggests that media coverage expedites the impounding of information into
prices. On the other hand, the positive correlation between media coverage
and analyst forecast dispersion shows that media coverage does not lead to the
convergence of opinions. These observations suggest that mass media’s effect
on security pricing stems from its ability to disseminate information broadly,
rather than to shape opinions or form consensus.
 15406261, 2009, 5, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2009.01493.x by Sichuan University, Wiley Online Library on [06/03/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
2050 The Journal of FinanceR

One practical implication of our results is that coverage by mass media can
play a role in alleviating information problems even if it does not break gen-
uine news. This has the further implication that companies’ media relations
activities can affect their cost of capital. In recent years, regulatory changes in
the securities industry and cuts in Wall Street research departments have left
many firms without analyst coverage. Our results suggest that the media (and
firms’ media relations departments) may offer a substitute or a supplement to
traditional channels of corporate information such as analyst coverage.

Appendix
Table AI
Variables’ Definitions
Stock Characteristics

Amihud’s (2002) illiquidity Stock’s absolute return divided by its daily dollar trading
ratio volume, scaled by 106 .
Analyst coverage Natural log of 1 plus the number of analysts issuing earnings
forecasts on the stock in the past year.
Analyst dispersion Natural log of 1 plus the standard deviation of analyst forecasts
divided by the absolute value of the mean forecast.
Bid-ask spread Difference between the ask and the bid prices divided by the
midpoint.
Book-to-market Natural log of the book value of equity divided by the market
value of equity, as of the previous year end.
Dollar trading volume Daily value of trades in a stock, averaged over all days in a year.
Fraction of individual Percentage of the stock’s shares outstanding owned by
ownership individuals.
Idiosyncratic volatility Natural log of the residual stock return from a Fama-French
(1993) three-factor regression based on daily data.
Idiosyncratic volatility per Idiosyncratic volatility scaled by the number of investors
investor obtained from 13f filings.
Past year (month) absolute Absolute value of past year (month) return.
return
Past year (month) return (Signed) stock’s return measured over the previous year (month).
Price Average closing price during the previous month.
Size Natural log of the average market capitalization of equity over
the previous calendar year, in thousands of dollars.
Factors

Mkt-rf Market return minus return on the U.S. Treasury bond.

SMB Return of a portfolio of small stocks minus the return of a
portfolio of large stocks.
HML Return on a portfolio of stocks with high book-to-market ratio,
minus return on a portfolio of stocks with low book-to-market
ratio.
UMD Return on a portfolio of stocks with a high past 12-month return,
minus the return on a portfolio of stocks with a low past
12-month return.
LIQ Traded liquidity factor constructed by Pastor and Stambaugh
(2003).
 15406261, 2009, 5, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2009.01493.x by Sichuan University, Wiley Online Library on [06/03/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
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