The media effect on stock market overreaction

Authors: Chia-Chung Chan, Yueh-Yu Hsu, Li-Lu Chen

Journal: Chiao Da Management Review. Jun. 2015, 35(1): 47-72.

Keywords:
Overreaction; Media effect; Stock market; Market efficiency

Abstract:
The recent literature of behavioral finance has introduced that the overreaction or underreaction of share price movements can be explained by investors’ irrational investment decisions. Besides re-examining the overreaction hypothesis, this study further investigates whether media effect can cause or enhance market overreaction. We observe that the pace and magnitude of stock price mean reversion are positively associated with the average number of press releases and the magnitude of press exposure. Both the pace and magnitude of share price mean reversion are higher in the declining market (i.e., bad news) than in the advancing market (i.e., good news). We also find that the pace of share price mean reversion is slower for small firms than for large firms. However, the magnitude of share price mean reversion for small firms, exceeds that for large firms as holding period extends. Past studies apply overreaction phenomenon to develop contrarian investment strategies. We contribute to the literature by incorporating the media effect as an explanation for contrarian investment strategies.