Dec 7
2012
It turns out that reading local papers can have a financial upside. Every day I receive far more business publications than I have time to read. I have to decide how much attention to give to national sources, say, the Wall Street Journal and Bloomberg BusinessWeek, and how much to local papers such as the U-T San Diego, the San Diego Business Journal, and the San Diego Daily Transcript. In addition to reading as much as I can of the national publications, I tend to regularly peruse the local papers because they report on local firms.
These reports have made me wonder whether local press coverage of these firms makes any difference to investors. Said another way, is it valuable for investors to read their local business press? Thanks to new research by USD School of Business Finance professors Shreesh Deshpande and Marko Svetina, we now know more about how to answer this question.
In their paper, “Does local news matter to investors?” published in the prominent journal, Managerial Finance, professors Deshpande and Svetina investigate whether announcements of “earnings surprises” in the local news have any measurable effect on stock prices. And indeed they do.
So, you’re reading along, and suddenly you’re smack up against an esoteric term like “earnings surprises,” and what are you supposed to do with that? In a nutshell, an earnings surprise can be either positive or negative. (We like the positive ones.) When it’s based on financial analysts’ forecasts, a negative surprise is when an announcement of reported earnings is below the median of analysts’ forecasts, and a positive surprise is when the announcement is above the median. In the local newspaper, a positive or negative earnings surprise is when the news report compares reported earnings to the prior-year-same-quarter earnings, and is higher or lower.
Based on data hand-collected from 15 years(!) of quarterly earnings announcements, professors Deshpande and Svetina compare abnormal stock returns resulting from earnings surprises based on local newspaper announcements with those from earnings surprises based on financial analysts’ forecasts. Think of this as the difference between local news reports and reports from national financial analysts.
There are many interesting results in the paper, but one important finding is this. When a local newspaper article signals a positive earnings surprise relative to prior-year-same-quarter, but the earnings surprise based on financial analysts’ forecasts is negative, the negative stock price impact is significantly lessened. It seems that the stock price impact of earnings announcements is greatly influenced by local newspaper reports of earnings announcements of local firms.
I am always intrigued to find ways that academic research sheds light on everyday activities, and this is an example of that kind of relevance. The practical take-away from this research is that it is worthwhile supplementing your reading of the national business press with reports from your local press. Not only because it provides a better understanding of the business community, but also because you are likely to make better investment decisions.
