Impact of media on stock returns: an in-depth empirical study in China

Abstract

Purpose – Media-effect refers to the phenomenon that stocks with no or low media coverage earn higher returns than stocks with high coverage. This paper aims to explore the existence of media-effect in China stock market and tests the two competing hypotheses explaining this phenomenon. Design/methodology/approach – The authors construct a research sample based on a media-coverage event: the publications of lists of the most wealthy Chinese individuals; in addition, they identify the stocks of which listed firms are led by a controller who is recognized on the publicized lists. This paper uses event study methodology to test the existence of media effect in China A-share market. The authors employed propensity score matching (PSM) to construct a control group with same number of non-listed stocks. Then compared the returns of the two portfolios to test the risk premium hypothesis, and the abnormal trading volume and price reaction around the event date is explored to test the over-attention underperformance hypothesis. Findings – Sampled stocks show significantly negative abnormal returns within the event period, but the matched control group formed by PSM shows no significant abnormal return, indicating that the risk premium hypothesis is not supported. Covered stocks show significantly magnified trading volume. The portfolio gains significant positive return before the event date but turns significantly negative afterward, which is consistent with the over-attention underperformance hypothesis. Originality/value – This paper offers insights into media-effect in China stock market and provides empirical evidence explaining its existence.