1932

Abstract

Because theories in finance rely critically on what agents know, designing powerful tests of these theories requires measuring information transmission. In this review, I characterize the rapidly growing subfield directly analyzing information in financial markets. Its three hallmarks are the examination of () a wide array of informative events, () different mechanisms for transmitting information, and () measures of information content based on nonnumeric information. Recent research directly measures flows of information to shed light on diverse phenomena in asset pricing, such as market reactions to news and nonnews, investors’ portfolio choices, and mutual fund flows and returns, and in corporate finance, such as mergers and acquisitions, initial public offering (IPO) underpricing, and executive compensation. Continued improvements in access to data and computing power are likely to propel this line of research for years to come.

Loading

Article metrics loading...

/content/journals/10.1146/annurev-financial-110613-034449
2014-12-01
2024-03-29
Loading full text...

Full text loading...

/deliver/fulltext/financial/6/1/annurev-financial-110613-034449.html?itemId=/content/journals/10.1146/annurev-financial-110613-034449&mimeType=html&fmt=ahah

Literature Cited

  1. Ahern K, Sosyura D. 2013. Rumor has it: sensationalism in financial media. Work. Pap., Ross Sch. Bus., Univ. Michigan
  2. Ahern K, Sosyura D. 2014. Who writes the news? Corporate press releases during merger negotiations. J. Finance 69:241–91 [Google Scholar]
  3. Antweiler W, Frank MZ. 2004. Is all that talk just noise? The information content of Internet stock message boards. J. Finance 59:1259–94 [Google Scholar]
  4. Aumann RJ. 1976. Agreeing to disagree. Ann. Stat. 4:1236–39 [Google Scholar]
  5. Banerjee S, Kremer I. 2010. Disagreement and learning: dynamic patterns of trade. J. Finance 65:1269–302 [Google Scholar]
  6. Barber BM, Loeffler D. 1993. The “Dartboard” column: second-hand information and price pressure. J. Financ. Quant. Anal. 28:273–84 [Google Scholar]
  7. Barber BM, Odean T. 2008. All that glitters: the effect of attention and news on the buying behavior of individual and institutional investors. Rev. Financ. Stud. 21:785–818 [Google Scholar]
  8. Baumeister RF, Bratslavsky E, Finkenauer C, Vohs KD. 2001. Bad is stronger than good. Rev. Gen. Psychol. 5:323–70 [Google Scholar]
  9. Berry TD, Howe KM. 1994. Public information arrival. J. Finance 49:1331–46 [Google Scholar]
  10. Beschwitz BV, Keim DB, Massa M. 2013. Media-driven high frequency trading: implications of errors in news analytics. Work. Pap., INSEAD
  11. Bhattacharya U, Galpin N, Ray R, Yu X. 2009. The role of the media in the Internet IPO bubble. J. Financ. Quant. Anal. 44:657–82 [Google Scholar]
  12. Bodnaruk A, Loughran T, McDonald B. 2013. Using 10-K text to gauge financial constraints. Work. Pap., Dep. Finance, Mendoza Coll. Bus., Univ. Notre Dame
  13. Böhme R, Holz T. 2006. The effect of stock spam on financial markets. Work. Pap., Technische Univ. Dresden, Ger
  14. Bollen J, Mao H, Zeng X. 2011. Twitter mood predicts the stock market. J. Comp. Sci. 2:1–8 [Google Scholar]
  15. Boudoukh J, Feldman R, Kogan S, Richardson M. 2013. Which news moves stock prices? A textual analysis. Work. Pap., Stern Sch. Bus., N.Y. Univ
  16. Brunnermeier MK. 2005. Information leakage and market efficiency. Rev. Financ. Stud. 18:417–57 [Google Scholar]
  17. Bushee BJ, Core JE, Guay W, Hamm SJW. 2010. The role of the business press as an information intermediary. J. Account. Res. 48:1–19 [Google Scholar]
  18. Bushee BJ, Miller GS. 2012. Investor relations, firm visibility, and investor following. Account. Rev. 87:867–97 [Google Scholar]
  19. Busse JA, Green TC. 2002. Market efficiency in real time. J. Financ. Econ. 65:415–37 [Google Scholar]
  20. Carvalho C, Klagge N, Moench E. 2011. The persistent effects of a false news shock. J. Empir. Finance 18:597–615 [Google Scholar]
  21. Chan WS. 2003. Stock price reaction to news and no-news: drift and reversal after headlines. J. Financ. Econ. 70:223–60 [Google Scholar]
  22. Chen H, De P, Hu Y, Hwang B. 2013. Customers as advisors: the role of social media in financial markets. Work. Pap., Krannert Sch. Bus., Purdue Univ
  23. Colla P, Mele A. 2010. Information linkages and correlated trading. Rev. Financ. Stud. 23:203–46 [Google Scholar]
  24. Cook DO, Kieschnick R, Van Ness RA. 2006. On the marketing of IPOs. J. Financ. Econ. 82:35–61 [Google Scholar]
  25. Cornell B. 2013. What moves stock prices: another look. J. Portfol. Manag. 39:32–38 [Google Scholar]
  26. Cutler DM, Poterba JM, Summers LH. 1989. What moves stock prices?. J. Portfol. Manag. 15:4–12 [Google Scholar]
  27. Da Z, Engelberg J, Gao P. 2011. In search of attention. J. Finance 66:1461–99 [Google Scholar]
  28. Das SR. 2011. News analytics: framework, techniques, and metrics. The Handbook of News Anaytics in Finance Mitra G, Mitra L. 43–71 Chichester, UK: Wiley [Google Scholar]
  29. Das SR, Chen MY. 2007. Yahoo! for Amazon: sentiment extraction from small talk on the web. Manag. Sci. 53:1375–88 [Google Scholar]
  30. Davies PL, Canes M. 1978. Stock prices and the publication of second-hand information. J. Bus. 51:43–56 [Google Scholar]
  31. De Long JB, Shleifer A, Summers LH, Waldmann RJ. 1990. Noise trader risk in financial markets. J. Polit. Econ. 98:703–38 [Google Scholar]
  32. Demers E, Lewellen K. 2003. The marketing role of IPOs: evidence from internet stocks. J. Financ. Econ. 68:413–37 [Google Scholar]
  33. Dewally M. 2003. Internet investment advice: investing with a rock of salt. Financ. Anal. J. 59:65–77 [Google Scholar]
  34. Dougal C, Engelberg J, García D, Parsons CA. 2012. Journalists and the stock market. Rev. Financ. Stud. 25:639–79 [Google Scholar]
  35. Duffie D. 2010. Asset price dynamics with slow-moving capital. J. Finance 65:1237–67 [Google Scholar]
  36. Dyck A, Volchkova N, Zingales L. 2008. The corporate governance role of the media: evidence from Russia. J. Finance 63:1093–135 [Google Scholar]
  37. Dyck A, Zingales L. 2003. The media and asset prices. Work. Pap., Harvard Bus. Sch
  38. Eisensee T, Strömberg D. 2007. News droughts, news floods, and U.S. disaster relief. Q. J. Econ. 122:693–728 [Google Scholar]
  39. Engelberg J. 2008. Costly information processing: evidence from earnings announcements. Work. Pap., Kellogg Sch. Manag., Northwest. Univ
  40. Engelberg J, Parsons CA. 2011. The causal impact of media in financial markets. J. Finance 66:67–97 [Google Scholar]
  41. Engelberg J, Sasseville C, Williams J. 2012. Market madness? The case of Mad Money. Manag. Sci. 58:351–64 [Google Scholar]
  42. Enikolopov R, Petrova M, Sonin K. 2013. Social media and corruption. Work. Pap., New Econ. Sch
  43. Falkenstein EG. 1996. Preferences for stock characteristics as revealed by mutual fund portfolio holdings. J. Finance 51:111–35 [Google Scholar]
  44. Fama EF. 1998. Market efficiency, long-term returns, and behavioral finance. J. Financ. Econ. 49:283–306 [Google Scholar]
  45. Fama EF, Fisher L, Jensen MC, Roll R. 1969. The adjustment of stock prices to new information. Int. Econ. Rev. 10:1–21 [Google Scholar]
  46. Fang LH, Peress J. 2009. Media coverage and the cross-section of stock returns. J. Finance 64:2023–52 [Google Scholar]
  47. Fang LH, Peress J, Zheng L. 2011. Does media coverage of stocks affect mutual funds’ trading and performance? Work. Pap., INSEAD
  48. Fehle F, Tsyplakov S, Zdorovtsov V. 2005. Can companies influence investor behaviour through advertising? Super Bowl commercials and stock returns. Eur. Financ. Manag. 11:625–47 [Google Scholar]
  49. French KR, Roll R. 1986. Stock return variances: the arrival of information and the reaction of traders. J. Financ. Econ. 17:5–26 [Google Scholar]
  50. Frieder L, Zittrain J. 2007. Spam works: evidence from stock touts and corresponding market activity. Hastings Commun. Entertain. Law J. 30:479–520 [Google Scholar]
  51. García D. 2013. Sentiment during recessions. J. Finance 68:1267–300 [Google Scholar]
  52. Giannini R, Irvine P, Shu T. 2013. Do local investors know more? A direct examination of individual investors’ information set. Work. Pap., Dep. Bank. Finance, Univ. Georgia
  53. Griffin JM, Hirschey NH, Kelly PJ. 2011. How important is the financial media in global markets?. Rev. Financ. Stud. 24:3941–92 [Google Scholar]
  54. Grob-Klubmann A, Hautsch N. 2011. When machines read the news: using automated text analytics to quantify high frequency news-implied market reactions. J. Empir. Finance 18:321–40 [Google Scholar]
  55. Grossman SJ, Stiglitz JE. 1980. On the impossibility of informationally efficient markets. Am. Econ. Rev. 70:393–408 [Google Scholar]
  56. Gurun UG, Butler AW. 2012. Don’t believe the hype: local media slant, local advertising, and firm value. J. Finance 67:561–97 [Google Scholar]
  57. Han B, Hirshleifer D. 2012. Self-enhancing transmission bias and active investing. Work. Pap., Merage Sch. Bus., Univ. Calif. Irvine
  58. Hanke M, Hauser F. 2008. On the effects of stock spam e-mails. J. Financ. Mark. 11:57–83 [Google Scholar]
  59. Hanley KW, Hoberg G. 2010. The information content of IPO prospectuses. Rev. Financ. Stud. 23:2821–64 [Google Scholar]
  60. Harris M, Raviv A. 1993. Differences of opinion make a horse race. Rev. Financ. Stud. 6:473–506 [Google Scholar]
  61. He H, Wang J. 1995. Differential information and dynamic behavior of stock trading volume. Rev. Financ. Stud. 8:919–72 [Google Scholar]
  62. Heimer RZ, Simon D. 2012. Facebook finance: how social interaction propagates active investing. Work. Pap., Int. Bus. Sch., Brandeis Univ
  63. Hirshleifer D, Subrahmanyam A, Titman S. 1994. Security analysis and trading patterns when some investors receive information before others. J. Finance 49:1665–98 [Google Scholar]
  64. Hirshleifer D, Teoh SH. 2003. Limited attention, information disclosure, and financial reporting. J. Account. Econ. 36:337–86 [Google Scholar]
  65. Hoberg G, Phillips GM. 2010. Product market synergies and competition in mergers and acquisitions: a text-based analysis. Rev. Financ. Stud. 23:3773–811 [Google Scholar]
  66. Hoberg G, Phillips GM, Prabhala NR. 2014. Product market threats, payouts, and financial flexibility. J. Finance 69:293–324 [Google Scholar]
  67. Hu B, McInish T, Zeng L. 2010. Gambling in penny stocks: the case of stock spam e-mails. Int. J. Cyber Criminol. 4:610–29 [Google Scholar]
  68. Huberman G, Regev T. 2001. Contagious speculation and a cure for cancer: a nonevent that made stock prices soar. J. Finance 56:387–96 [Google Scholar]
  69. Jaccard P. 1901. Étude comparative de la distribution florale dans une portion des Alpes et des Jura. Bull. Soc. Vaud. Sci. Nat. 37:547–79 [Google Scholar]
  70. Jegadeesh N, Wu AD. 2013. Word power: a new approach for content analysis. J. Financ. Econ. 110:712–29 [Google Scholar]
  71. Jennings R, Starks L. 1985. Information content and the speed of stock price adjustment. J. Account. Res. 23:336–50 [Google Scholar]
  72. Kandel E, Pearson ND. 1995. Differential interpretation of public signals and trade in speculative markets. J. Polit. Econ. 103:831–72 [Google Scholar]
  73. Karabulut Y. 2013. Can Facebook predict stock market activity? Work. Pap., Goethe Univ., Frankfurt, Ger
  74. Kearney C, Liu S. 2014. Textual sentiment in finance: a survey of methods and models. Int. Rev. Finance Anal. 33:171–85 [Google Scholar]
  75. Kim O, Verrecchia RE. 1994. Market liquidity and volume around earnings announcements. J. Account. Econ. 17:41–67 [Google Scholar]
  76. Kim YH, Meschke F. 2011. CEO interviews on CNBC. Work Pap., Nanyang Technol. Univ
  77. Klibanoff P, Lamont O, Wizman TA. 1998. Investor reaction to salient news in closed-end country funds. J. Finance 53:673–99 [Google Scholar]
  78. Kuhnen CM, Niessen A. 2012. Public opinion and executive compensation. Manag. Sci. 58:1249–72 [Google Scholar]
  79. Lewellen J, Nagel S. 2006. The conditional CAPM does not explain asset-pricing anomalies. J. Financ. Econ. 82:289–314 [Google Scholar]
  80. Li F. 2008. Annual report readability, current earnings, and earnings persistence. J. Account. Econ. 45:221–47 [Google Scholar]
  81. Li F. 2010. Textual analysis of corporate disclosures: a survey of the literature. J. Account. Lit. 29:143–65 [Google Scholar]
  82. Liu LX, Sherman AE, Zhang Y. 2014. The long-run role of the media: evidence from initial public offerings. Manag. Sci. 60:1945–64 [Google Scholar]
  83. Loughran T, McDonald B. 2011. When is a liability not a liability? Textual analysis, dictionaries, and 10-Ks. J. Finance 66:35–65 [Google Scholar]
  84. Loughran T, McDonald B. 2013. IPO first-day returns, offer price revisions, volatility, and Form S-1 language. J. Financ. Econ. 109:307–26 [Google Scholar]
  85. Loughran T, McDonald B. 2014a. Measuring readability in financial disclosures. J. Finance 69:1643–71 [Google Scholar]
  86. Loughran T, McDonald B. 2014b. Regulation and financial disclosure: the impact of plain English. J. Regul. Econ. 45:94–113 [Google Scholar]
  87. Malmendier U, Tate G, Yan J. 2013. Overconfidence and early-life experiences: the effect of managerial traits on corporate financial policies. J. Finance 66:1687–733 [Google Scholar]
  88. Manela A, Moreira A. 2013. News implied volatility and disaster concerns. Work. Pap., Olin Bus. Sch., Washington Univ., St. Louis
  89. Marshall BR, Visaltanachoti N, Cooper G. 2014. Sell the rumour, buy the fact?. Account. Finance 54:237–249 [Google Scholar]
  90. Mayew WJ, Venkatachalam M. 2012. The power of voice: managerial affective states and future firm performance. J. Finance 57:1–43 [Google Scholar]
  91. Merton RC. 1987. A simple model of capital market equilibrium with incomplete information. J. Finance 42:483–510 [Google Scholar]
  92. Milgrom P, Stokey N. 1982. Information, trade, and common knowledge. J. Econ. Theory 26:17–27 [Google Scholar]
  93. Miller E. 1977. Risk, uncertainty, and divergence of opinion. J. Finance 32:1151–68 [Google Scholar]
  94. Mitchell ML, Mulherin JH. 1994. The impact of public information on the stock market. J. Finance 49:923–50 [Google Scholar]
  95. Mullainathan S, Shleifer A. 2005a. Persuasion in finance. Work. Pap. 11838, Natl. Bur. Econ Res
  96. Mullainathan S, Shleifer A. 2005b. The market for news. Am. Econ. Rev. 95:1031–53 [Google Scholar]
  97. Neuhierl A, Scherbina A, Schlusche B. 2013. Market reaction to corporate press releases. J. Financ. Quant. Anal 48:1207–40 [Google Scholar]
  98. Niederhoffer V. 1971. The analysis of world events and stock prices. J. Bus. 44:193–219 [Google Scholar]
  99. Ozsoylev HN, Walden J. 2011. Asset pricing in large information networks. J. Econ. Theory 146:2252–80 [Google Scholar]
  100. Patell JM, Wolfson MA. 1984. The intraday speed of adjustment of stock prices to earnings and dividend announcements. J. Financ. Econ. 13:223–52 [Google Scholar]
  101. Peng L, Xiong W. 2006. Investor attention, overconfidence and category learning. J. Financ. Econ. 80:563–602 [Google Scholar]
  102. Peress J. 2008. Media coverage and investors’ attention to earnings announcements. Work. Pap., INSEAD
  103. Peress J. 2014. The media and diffusion of information in financial markets: evidence from newspaper strikes. J. Finance In press. doi: 10.1111/jofi.12179 [Google Scholar]
  104. Pound J, Zeckhauser R. 1990. Clearly heard on the street: the effect of takeover rumors on stock prices. J. Bus. 63:291–308 [Google Scholar]
  105. Reuter J, Zitzewitz E. 2006. Do ads influence editors? Advertising and bias in the financial media. Q. J. Econ. 121:197–227 [Google Scholar]
  106. Rogers JL, Skinner DJ, Zechman SLC. 2013. The role of media in disseminating insider trading news. Res. Pap. 13-34, Booth Sch. Bus., Univ. Chicago
  107. Roll R. 1988. R-squared. J. Finance 43:541–66 [Google Scholar]
  108. Rozin P, Royzman E. 2001. Negativity bias, negativity dominance, and contagion. Pers. Soc. Psychol. Rev. 5:296–320 [Google Scholar]
  109. Scheinkman JA, Xiong W. 2003. Overconfidence and speculative bubbles. J. Polit. Econ. 111:1183–219 [Google Scholar]
  110. Schmidt D. 2013. Investors’ attention and stock covariation: evidence from Google sport searches. Work. Pap., INSEAD
  111. Solomon DH. 2012. Selective publicity and stock prices. J. Finance 67:599–637 [Google Scholar]
  112. Solomon DH, Soltes EF, Sosyura D. 2014. Winners in the spotlight: media coverage of fund holdings as a driver of flows. J. Financ. Econ. 113:53–72 [Google Scholar]
  113. Tetlock PC. 2007. Giving content to investor sentiment: the role of media in the stock market. J. Finance 62:1139–68 [Google Scholar]
  114. Tetlock PC, Saar-Tsechansky M, Macskassy S. 2008. More than words: quantifying language to measure firms’ fundamentals. J. Finance 63:1437–67 [Google Scholar]
  115. Tetlock PC. 2010. Does public news resolve asymmetric information?. Rev. Financ. Stud. 23:3520–57 [Google Scholar]
  116. Tetlock PC. 2011. All the news that’s fit to reprint: do investors react to stale information?. Rev. Financ. Stud. 24:1481–512 [Google Scholar]
  117. Tumarkin R, Whitelaw RF. 2001. News or noise? Internet message board activity and stock prices. Financ. Anal. J. 57:41–51 [Google Scholar]
  118. Vega C. 2006. Stock price reaction to public and private information. J. Financ. Econ. 82:103–33 [Google Scholar]
/content/journals/10.1146/annurev-financial-110613-034449
Loading
/content/journals/10.1146/annurev-financial-110613-034449
Loading

Data & Media loading...

  • Article Type: Review Article
This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error