The Handbook of News Analytics in Finance

8.4 DOES NEWS FLOW MATTER?

The challenge of running long-term event studies with news flow datasets is how to control for the release of subsequent news items which may or may not be in the same direction. We find that the incidence of news is not highly autocorrelated. A company can switch from being a news winner to a news loser several times over a year. The average proportion of stocks switching from a news winner to loser (and vice versa) is fairly equal. This means that any news patterns are likely to be influenced by single news events rather than the accumulated reaction to multiple items.

Our focus is therefore on the short-term reaction to news. We measure the short-term price reaction on a sector-relative basis around news announcements which aims to capture the informational surprise of the news. We sort returns into three groups and categorize news flow as either positive, negative, or marginal to avoid reacting on every reported news item and focus on the major news releases. We then measure subsequent returns over days 2–5 and 5–10 post the announcement.

Figures 8.5 and 8.6 show the average short-term returns for different news items, distinguishing between good and bad news. Our results show that investors react strongly to earnings announcements and guidance news, which is not unsurprising as investors focus more on these news items when making their assessments. The share price reaction to other news is also important but lesser so compared with earnings-related ...