A cornerstone of efficient and transparent markets is freely available information. Information drives financial activity, and ensuring equitable access to that information is seen as critical to a well-functioning marketplace.
But does the mere action of placing a piece of financial news in the public domain make it readily seen and efficiently reflected in stock prices? According to my and others’ research, not necessarily.
In 2001 professors Gur Huberman and Tomer Regev of Columbia University drew attention to a peculiar sequence of market reactions to news regarding a cancer research breakthrough licensed by biotech firm EntreMed. The initial news release, printed as a scientific piece in Nature and reported in the popular press in November 1997, was accompanied by a 30% increase in EntreMed’s stock price. In May 1998, over five months after the initial breakthrough, the New York Times published a front-page piece with almost identical information. EntreMed’s stock price surged by over 300%. Whether the initial reaction in November was insufficient, or the frenzy in May was irrational, one thing was clear: The positioning of news, not just its newness, plays a pivotal role in how financial markets incorporate information.
In my research, I find that similar instances of too much and too little attention to financial news persist today. For instance, I find that news articles placed on the front page or at the top of news websites garner more reads. Readers also pay more attention to news about larger and better-known companies, to news published earlier in the week, and to negative news. And reprints of old news continue to spur market reactions. This might not surprise journalists or news junkies, but it challenges the idea that financial markets absorb all news equally, based only on financial relevance.
These pitfalls of news consumption emerge predictably from human psychology. A sizable literature documents the role that distraction plays: When faced with multiple competing cues, people have difficulty focusing their attention on the relevant information. The more complex the network of signals, the more difficult it is to extract pertinent information. For example, professors David Hirshleifer, Sonya Lim, and Siew Teoh of the University of California and DePaul University show that the market is less efficient in processing earnings announcements when a large number of releases occur at the same time. In “When Can the Market Identify Stale News?” James Hodson and I suggest that reactions to reprints of old news are likewise driven by complexity. Market participants are much more likely to mistake old news for new when the old information is drawn from multiple sources than when it is directly reprinted from a single previous story.
But although the market as a whole displays a variety of biases in processing financial news, not all finance professionals consume news in the same way. Some are faster, more active, and more sophisticated in identifying novel news. In “News Consumption: From Information to Returns,” I compare the news consumption patterns of different finance professionals. Broker dealers and hedge funds are much quicker, on average, to click on any given piece of news than banks or large investment management companies.
Hedge funds are also much more likely to be the first to get a piece of news. Hedge funds are only 8% of all financial professionals reading financial news. However, for 27% of all news articles, the very first click comes from a hedge fund reader. That means that even when a piece of information is public, hedge funds are more likely than other investors to find it first.
Hedge fund readers, along with family offices, private equity firms, and some broker dealers, are also among the least likely to read a piece of news that reprints old content. And they read far more news than any other group of finance professionals.
Does the more sophisticated consumption of news translate to more impact on the market? Yes. Increased attention by the more-active news readers like hedge fund investors is more predictive of stock price moves and trading volumes than increased attention by other investors, including large investment managers and pension funds. A one-standard-deviation increase in hedge fund attention corresponds to a 30 basis point larger return over the next day and a 3–4% higher trading volume.
These market swings occur because news consumption creates disagreement among investors about an investment’s prospects. In general, there are two main sources of trading volume: liquidity needs, where investors need to trade due to flows or portfolio rebalancing, and disagreement, where traders who hold different opinions make bets against each other. Since news releases (such as earnings announcements) do not systematically coincide with liquidity shocks, increased trading around news is attributed to disagreement. But why would public news increase disagreement?
In “Disagreement after News: Gradual Information Diffusion or Differences of Opinion?” I show that a large portion of disagreement around news is driven by people getting the news at different times. An investor who has not yet seen the news forms a willing counterparty to a trade put on by someone who has. A large portion of market activity is driven by something as simple as some people taking longer to read and process public news releases than others. In fact, moving from perfect information flows to perfect dispersion of readership causes trading volumes to surge by an additional 160%.
Bringing information into the public domain is extremely important. But so is sophisticated processing of the public information, especially given how quickly the news environment is changing.
As Tom Glocer, former CEO of news and financial information provider Reuters Group PLC, puts it: “A huge amount of time and effort is devoted by public companies to managing the divide between public and private potentially market-moving information. I can envision a future in which we abandon concepts like 10-Qs and 8-Ks in favor of a continuous stream of relevant performance data. This would be quite harrowing at first for public company executives, and contribute to daily volatility; however, over the long term, investors and managements would adjust.”
Such a future is exciting but could raise its own challenges. Modern-day proliferation of news, including reprints or repackaging of old articles, makes the market’s task of processing information ever more complex. Publishers exercise discretion over which news to print and where; investors read and trade on these public releases. Both sides are vitally important for financial markets’ stability and efficiency, especially at a time when daily news releases number in the millions.