Media reporting may impact stock prices beyond the dissemination of new information. According to the visibility hypothesis, media attention alone can permanently increase a firm’s value by broadening its investor base (Merton, 1987; Miller, 1977). Huberman and Regev (2001) analyze the puzzling case of a New York Times article, which did not contain any new facts but caused a dramatic rise in the stock price of interviews a small biotech company. They attribute EntreMed Inc (NASDAQ:ENMD)’s astounding market reaction to the article’s prominent position on the front page and to its optimistic tone and content that enthusiastic public attention can move stock prices away from fundamental values, possibly contributing to the formation of asset pricing bubbles.
Any empirical study that investigates the causal impact of media attention upon stock prices has to overcome three obstacles. First, it should move beyond anecdotal evidence and examine whether media attention systematically affects stock prices. Second, it has to separate attention from information effects. Finally, it should delineate the mechanism by which attention affects stock prices to assess whether media-generated attention indeed distorts security prices
(Engelberg and Parsons, 2011).
We believe that we can overcome these three obstacles by studying market reactions to almost 7,000 CEO interviews that were broadcast on the cable television channel CNBC between 1997 and 2006. The large number of interviews allows us to investigate whether media attention systematically affect stock prices. We can separate attention from information effects in a similar manner to Huberman and Regev (2001) since these interviews share essential characteristics with the article about EntreMed Inc (NASDAQ:ENMD): The article constituted a burst of optimism released to a large audience on the front page of the New York Times, which was very suggestive of a genuine news event, distracting from its low actual information content. Similarly, CEO interviews on CNBC are broadcast to a large audience, CEOs have strong incentives to be very optimistic about their companies, and their mere appearance on television is suggestive of a genuine news event.
PDF Link: SSRN-id2339529
H/T Jason Zweig