News affects stock price? You bet

We can all probably guess the least favorite news in the eyes of investors. Yes, it’s the earnings warning: Pre-announcing a disappointment in the numbers produces the most negative response in stock price, a new study shows.

The CXO Advisory blog, which reports daily on studies of investing theory and practice, provides a good summary of a February 2010 working paper by three finance professors who looked at the impact of 285,917 news releases from 2006 to 2009. Or you can access the original paper here.

Negative news hits stock prices harder, on average, than positive news helps, the study shows. And announcements of bad news also tend to be anticipated by stock price declines, suggesting the possibility of leaks.

The five most negative announcements for stock price impact? Pre-reporting bad financial results, FDA rejections of medical products, loss of a customer, poor financial performance on regular reporting dates, and product defects.

The five most positive? Pre-reporting better than expected financial results, share buybacks, FDA approvals of pharmaceuticals, spin-offs and EU pharma approvals.

During the financial crisis, context seemed to change the market’s reaction to news announcements: Issuances of debt or secondary equity offerings, for example, weren’t seen as such negative events during a time when weaker companies couldn’t access the capital markets.

The authors, who classify corporate announcements into nine major categories and 52 subcategories, believe regulatory changes such as Regulation FD in 2000 and Sarbanes-Oxley in 2002 have given news releases a more powerful impact on the market by encouraging an instantaneous, direct-to-shareholder communication mode. In fact, the professors observe:

Possibly as a result of the vagueness of the SEC’s information release requirements firms err on the side of disclosing too much information. Additionally, firms may prefer to release immaterial news in order to attract the attention of potential investors.

One possible use of this study for IR is to help gauge materiality of various kinds of events – the loss or gain of a major customer, for example – based on the average impact that similar events have had on companies’ stock prices.

© 2010 Johnson Strategic Communications Inc.


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2 Responses to “News affects stock price? You bet”

  1. Jnyaneshwar Prabhu Says:

    iMiners, Inc. provided all the data to the professors for this study.

    We have categorized all press releases issued by US public companies, since April 2006, in to one of 10 major categories and 69 subcategories. We currently have about 600,000 press releases in our database and growing at the rate of 750 each day!

    PR Cycle subscribers can search our entire database of over 600,000 categorized news releases, for releases and their stock price impacts, by Company, By Industry, By Category, By Subcategory, By Date Range, and By Keywords. Our subscribers include professors from UC Davis, Berkeley, and Harvard.

    We also deliver a subscription-based “Press Releases By Type” module to public companies so their shareholders and investors can find relevant releases, quickly! Our customers include NASDAQ OMX, Del Monte Foods, and Nvidia Corporation. We have categorized every release issued by every public company, since April 2006, and have this module “install-ready” for most public companies. All they have to do is create an additional link called “Press Releases By Type” in their IR website navigation panel, that links to an iMiners provided URL and we will render all the content.

    Many more detailed studies are in progress by our PR Cycle subscribers and will be announced soon.

  2. Gold ETF Says:

    It took three finance professors to tell us that news can affect stock prices? Really? Only three? …Geeze… Do you think I could get paid for a paper that suggested grass is green or the sky is blue?

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