The Causal Impact of Media in Financial Markets
Joseph Engelberg & Christopher Parsons
University of North Carolina Working Paper, October 2009
It is challenging to disentangle the causal impact of media reporting from the impact of the information being reported. We solve this problem by comparing the behaviors of investors with access to different media coverage of the same information event. First, we use zip codes to identify 19 mutually exclusive trading regions, corresponding to 19 large U.S. cities and local newspapers (e.g., the Houston Chronicle). For all earnings announcements of S&P 500 Index firms, we find that local media coverage strongly predicts local trading, after controlling for characteristics of the earnings surprise, firm, local investors, and reporting newspaper(s). Reverse causation does not explain our findings. The local coverage-local trading effect: 1) holds for firms unlikely to be of local interest (e.g., remotely located, sparsely held by local investors) and 2) disappears entirely during extreme weather events, which leaves media content unchanged, but disrupts transmission to investors. The evidence supports the idea that media -- apart from the information they transmit -- affect investor behavior.
This is a little surprising to me. Though people watch shows about investing, so they must USE that stuff, even though it has no (and can't possibly have) any useful information.
(nod to Kevin L)