Media Coverage, Heterogeneous Beliefs, and Stock Price Bubbles

Abstract

The financial crisis induced by Lehman Brothers originated from media coverage of unauthentic rumors. In financial markets, the concept of “self-fulfilling prophecy” highlights the importance of market participants’ beliefs, and brings attention to the media’s controversial role by questioning whether intensive media coverage impacts investor sentiment and the pricing of financial assets. This paper uses the intensity of media coverage and unique trading records of retail investors to investigate the effect of media coverage on stock price bubbles. The analysis is based on a sample of daily individual transactions records from the Shanghai Stock Exchange and the China Core Newspapers Full-Text Database. The first part of the study shows that media coverage is positively correlated to stock price. In addition, results analysis indicates that media coverage is positively correlated to the cumulative divergence of opinion (heterogeneous beliefs), which in turn induces stock price bubbles. The second part of the study measures changes in investor sentiment based on the daily retail transactions, and finds that media coverage creates stock price bubbles by influencing retail investor sentiment.