Yellow Press = The original ‘fake news’
From the Archives
The relationship between journalism, media, and financial markets is one of love and hate. We all know that stories can move markets, and there are exemplary investigative journalists that expose wrongdoing and fraud to investors. However, the term ‘fake news’ has also become a mainstay term in recent years, akin to the ‘yellow journalism’ quip from a century ago. This week we dive into the turbulent relationship between the press and markets.
The School of Financial History
If you follow me on Twitter, you may have seen this tweet I posted on Monday. Suffice it to say that I was shocked by the response. Almost 300 people responded with their input on ideas for interesting topics! While the concept is early days, this week I have started to put together the website and gather commitments from financial historians / known-investors for a course that will certainly satisfy your historical curiosities. To stay up to date on this course, and receive my Sunday Reads in your inbox, subscribe here.
Thinking of organizing an online Financial History course with lectures by financial history professors, webinars w/ investors, and reading materials.
What topics would you want?
– Bubbles, Manias & Frauds
– Central Banks
– Market Structure
– The History of Debt
— Jamie Catherwood (@jfc_3_) May 25, 2020
Now, let’s dive in!
As today’s links focus on the media and financial news, I wanted to kick off the Sunday Reads with a piece of top-notch journalism from Jason Zweig at the Wall Street Journal. Some of you may remember the story of A.P. Giannini that I included a few weeks back , but it was Jason who told me about this story, and he’s written a new piece on Giannini that is just incredible. Even better, it’s part of a new series that Jason’s writing for the WSJ: Back in Business is a new, occasional column that will put the present day in perspective by looking at business history and those who shaped it.
The Effect of War Risk on Managerial and Investor Behavior: Evidence From the Brussels Stock Exchange in the Pre-1914 Era
In this fascinating article by Gertjan Verdickt, he uses news-based measures to assess the behavior of both managers and investors when faced with the threat of war.
“With two news-based measures on war, I document that managers mitigated war risk through dividend cuts, arguably to establish a war chest. Moreover, I find that companies postponed their initial public offerings and that foreign companies were more likely to delist after the onset of wars. Investors reacted negatively to the increase in war news coverage. There is evidence of mean-reversion after a threat of war and a negative drift following the start of war. Finally, I highlight the importance of proximity to military conflicts. In general, the evidence indicates that both managers and investors became more risk averse as a consequence of war news.”
For managers, Gertjan demonstrates that:
“Managers mitigated war risk through their dividend policy. When Act increased, I document a contemporaneous decrease in dividend growth – while there is no significant effect when Threat increased. It confirms the importance of dividends as information channel for investors. Only when news was really bad, companies were willing to consider a dividend cut. I also investigate the mechanism behind this effect. I show that the dividend cuts were not the result of a decrease in cash-flows but rather to establish a war chest. The findings suggests that the outbreak of war made firms more risk averse. This conclusion is supported through robustness tests and anecdotal evidence.
Another important decision managers can make is the timing of equity and bond initial public offerings. I find that an increase in Threat and Act leads to a significant decrease in the number of domestic and foreign IPOs. Even when I control for IPO wave, business cycle variation or past stock returns, the evidence suggests that firms postponed their IPOs due to the increase in war news coverage. This points to manager becoming more risk averse. Moreover, I show that foreign companies were more likely to delist from the BSE after an increase in Act – while there is no effect for Threat. Since stock delistings were costly, and most often an irredeemable decision, it is intuitive that companies delayed such a decision only when news was really bad. Therefore, the evidence shows that war risk was an important factor in managerial decisions.”
“Second, I document investors changed their expectations as a consequence of war risk. An increase in Threat and Act has a contemporaneous decrease in stock prices. In the case of Threat, the results point to an increase in expected returns. Since there is only one lag of Threat significant, this indicates that the effect is temporary (i.e. mean-reversion). When Act increases, the magnitude of the impact is larger. There are two explanations. First, investors became more risk averse. They changed expectations on future returns and current dividend growth rates, simultaneously. Second, the outbreak of wars is associated with larger uncertainty and welfare costs. I show that Act has a permanent negative impact on stock prices (i.e. negative drift). Hence, I conclude that investors wanted to be compensated for the additional risks, and thus increased their expected returns.
There is evidence of the importance of proximity to war. Increases in the metrics lead to a contemporaneous decrease in stock prices for European countries, not captured by the measures. For other countries, however, there is no significant change in stock prices, following an increase in the level of Threat and Act. This suggests that investors assess the likelihood of spill-over to other countries. Investors would only sell stocks when they consider the possibility of a war to be high. This highlights that war risk was an important source of systematic risk, but it was local rather than global. I fail to find evidence to that colonial stocks are affected by events in their controlling countries, also referred to as the empire effect. In turn, this highlights potential diversification opportunities for investors. Since the industries are not driving the results, investors should diversify their portfolio on the country rather than sector level.”
Do news stories move markets? Are markets efficiently priced?
These important questions are addressed in this fascinating article:
“How much of the short run volatility of asset prices is due to the arrival of news? How much can be accounted for by other factors like behavioral biases or frictions in the market micro-structure? In today’s markets these questions are difficult to answer because of the complexity of information flows. I use a natural experiment to answer them. During the 18th century a number of British stocks were traded on the Amsterdam exchange and all relevant information from England reached Amsterdam through mail boats. I reconstruct the arrival dates of these boats. This allows me to identify the flow of information directly. I then measure the effect of information on the volatility of the British stocks traded in Amsterdam. Stock prices moved significantly more after the arrival of news. Nevertheless in the absence of new, public information, price changes were still considerable. Volatility in “quiet” periods amounted to between 50 and 703 of that observed in periods with news. I construct a model of share trading with frictions that explains why asset prices move in periods when no new public information reaches the market. The model analyzes how an insider trades on his private information. An informed agent unveils his information only slowly and information asymmetry, although decreasing, remains. Prices will be inherently volatile even if no public news reaches the market. Private information also has an eff on uninformed trading. As information asymmetries gradually decrease, it becomes less costly for uninformed agents to trade. In consequence, uninformed trading increases over time. When the impact of private information on volatility becomes less dominant, a larger fraction of asset price movements is explained by uninformed trading. Empirical results for share trading in 18th century Amsterdam are consistent with the model’s predictions.”
Financial media outlets get a lot of stick these days for negatively influencing investor’s behavior, and perhaps exacerbating market panics with overly ominous headlines. Robert Shiller has even argued that the media are:
“Fundamental propagators of speculative price movements through their efforts to make news interesting to their audience.”
This paper studies this phenomenon in the British Railway mania of the 19th century.
“We examine the role of the news media during the British Railway Mania, arguably one of the largest financial bubbles in history. Our analysis suggests that the press responded to changes in the stock market, and its reporting of recent events may have influenced asset prices. However, we find no evidence that the sentiment of the media, or the attention which it gave to particular stocks, had any influence on exacerbating or ending the Mania. The main contribution of the media was to provide factual information which investors could use to inform their decisions.”
Using sentiment analysis, this study pores through hundreds of news articles and newspapers to gauge the potential impact of media on stock returns during the Railway Mania.
“Our results suggest that the media may have been affected by stock returns, and that media reporting of recent events may have had an influence on stock prices. However, of most interest is the finding that the sentiment of the media had no impact in hyping railway stock prices, and cannot be blamed for exacerbating the Mania for investing in railway shares.”
“Perhaps of more interest with regards the relationship between the media and a bubble, the results also imply that individual stocks were not successfully hyped by the media. Although those firms which received the most coverage tended to earn higher returns, this was due to standard risk factors, and not due to a psychological bias on the part of investors which could have led to certain stocks being more sought after simply because they received more attention.“
In conclusion, the authors reiterate that the media was not to blame for this speculative mania.
“Our evidence suggests that the media did not play a major role in propagating (or bringing to an end) one of the ‘greatest bubbles in history’. The editorial content of the railway specific media did not boost stock returns during the boom, and the opinion pieces of The Times and the Economist did not cause the market crash. Although those companies which received greater coverage also experienced a greater price reversal, this was primarily due to other risk factors. The media may have played some role in the Mania by disseminating information, but it had little influence on investors via its editorial opinion pieces.”
Headlines during bear markets today have a tendency to give off ‘Armageddon’ vibes (think CNBC’s “Markets in Turmoil”). The newspapers are also a great source for understanding investor’s sentiment in a particular period. Performing text and sentiment analysis on over 35 MILLION (!) newspaper titles, this article compares the content of news articles with other major economic indicators and measures of financial instability.
Also, similar to how we would say that a sign of the market ‘top’ is when bars start showing CNBC instead of sports games, it’s interesting to see the coverage of financial markets in national newspapers change over time in relation to market movements.
In the best chart of the whole article, the author also shares the long-term data for his ‘Financial Stress Indicator’, exhibiting both the exuberant periods where markets are overly calm, and the skyrocketing levels of ‘stress’ are markets are snapped back to reality:
‘In developing this thesis, we made an analysis of the newspaper industry in the United States, using The Wall Street Journal as a case study. This research project includes information and analysis on the evolution of Dow, Jones & Company (parent company of the newspaper) and its direct link to the Wall Street Journal from its initial days and along way this thesis highlights the changes that have been implemented between the 19th and the 21st centuries. This research addresses the troubled business model of the newspaper industry, asking why has it broken, how it broke, and essentially how can it be reinvented?’
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