The Media and the Financial Markets: A Review

• Author: Carlo Raimondo
• Date: 01 April 2019
• Published date: 01 April 2019
• DOI: http://doi.org/10.1111/ajfs.12250

The Media and the Financial Markets:

A Review

Carlo Raimondo*

Institute of Argumentation, Linguistics and Semiotics, Universit

a della Svizzera italiana, Switzerland

Received 9 April 2018; Accepted 8 February 2019

Abstract

In recent years there has been a growing body of literature about the role of the media in

finance. Textual analysis techniques and greater availability of data have created the possibil-

ity of going deeper into an analysis of soft information, including newspaper articles and

other media-generated content. This paper aims to present knowledge about the media’s role

in finance, calling on a large variety of research from the fields of finance, accounting, man-

agement, and economics. The goal and contribution of this paper are to provide a response

to these queries by referencing existing, but often unconnected, literature.

Keywords Media; Stock returns; Asset pricing; Corporate finance; Corporate governance;

Review

JEL Classification: D80, G14, L82

1. Introduction

The concept of information has been at the center of economics and finance litera-

ture for many years (Hayek, 1937; Arrow and Debreu, 1954; Stigler, 1961; Gross-

man and Stiglitz, 1980). In the previous century, the concept of knowledge was

developed and then integrated and transformed into the framework of information.

This was later applied to the theory and practice of finance, culminating in the the-

ory of efficient markets (Fama, 1970). More recently, some light has been shed on

the role of the media in this framework, with both theoretical and empirical contri-

butions. This review aims to survey this field of research, looking for a systematic

classification of the related scholarship. Several scholars have proven that the media

are effective with regard to many aspects of the financial industry. The role of the

media has also been emphasized in relation to specific situations such as stock

prices and returns (e.g., Tetlock, 2007, 2010; Fang and Peress, 2009; Engelberg and

Parsons, 2011; Dougal et al., 2012; Aman, 2013; Peress, 2014; Ahmad et al., 2015),

*Corresponding author: Institute of Argumentation, Linguistics and Semiotics, Universit

a

della Svizzera italiana, Via Giuseppe Buffi 13, 6900 Lugano, Switzerland. Tel: +41-58-666-

4791, Fax: +41-58-666-4647, email: carlo.raimondo@usi.ch

Asia-Pacific Journal of Financial Studies (2019) 48, 155–184 doi:10.1111/ajfs.12250

©2019 Korean Securities Association 155

initial public offerings (IPOs) and mergers and acquisitions (Pollock and Rindova,

2003; Pollock et al., 2008; Ho et al., 2010; Ahern and Sosyura, 2014; Liu et al.,

2014a,b; Shen and You, 2015; Bajo and Raimondo, 2017), and the corporate gover-

nance role of the media (Dyck and Zingales, 2002; Miller, 2006; Dyck et al., 2010;

Lauterbach and Pajuste, 2011).

Nevertheless, I argue that a precise classification would benefit the advancement

of studies of this specific niche. In order to clarify and compare the existent schol-

arship, I have developed a conceptual map which I present in Figure 1.

First, I decided to include in this review all the studies about the effect of the

media on financial markets and corporate finance. As a first, broad categorization, I

divided this universe of knowledge into two sub-streams, reflecting the two main

areas of finance scholarship: the direct effects (of the media) on financial markets

in terms of asset prices, and the media’s effect on corporate finance and corporate

governance.

On the left-hand side of Figure 1, the direct effects (of the media) on financial

markets consist of (i) the informative role of the media, (ii) the behavioral role of

the media (which is also related to the sensationalism phenomenon), and (iii) media

effects related to specific occasions. This last category refers to the role of the media

in IPOs, in seasoned equity offerings (SEOs), and in debt issuing, considering both

bond offerings and bank loans.

On the right-hand side of Figure 1, the studies that refer to the effects of the

media on corporate finance and corporate governance are illustrated. The two main

categories are (i) the media’s effects on corporate stakeholders, and (ii) the media’s

effectiveness in conditioning corporate decisions and outcomes. With regard to cor-

porate stakeholders, special attention should be paid to the role of the media in

relation to institutional investors, boards of directors, the CEO, and executive com-

pensation, and to the internal governance of the firm and agency problems. Refer-

ring to the media’s effects on corporate decisions and outcomes, I will detail the

role of the media related to mergers and acquisitions, disclosure and investor rela-

tions, and accounting fraud. In addition, a special paragraph will be devoted to the

determinant of media coverage.

It is also important to note how this stream of literature has benefited from the

evolution of computational linguistic techniques, allowing researchers to automati-

cally analyze large amounts of textual data and retrieve informative summaries. In

finance, the first wave of media-related research was based on a small set of simple

techniques, such as the computation of media coverage solely through counting the

total number of articles on a specific topic or company (Barber and Loeffler, 1993;

Chang and Suk, 1998; Klibanoff et al., 1998); the case-study or the event-study

approach (Huberman and Regev, 2001; Hirshleifer et al., 2009); or the manual

reading of media content and subsequent categorization (Dyck and Zingales, 2003;

Miller, 2006; Dyck et al., 2008). Later research developed methods to find tonal

coverage (i.e., a positive or a negative coverage) leveraging on Boolean searches

(Hamilton and Zeckhauser, 2004) and finally dictionary approaches to

C. Raimondo

156 ©2019 Korean Securities Association