Faculty Publications

Market Reaction To Business Week 'Inside Wall Street' Column: A Self-Fulfilling Prophecy

Document Type

Article

Keywords

Analyst following, Analyst recommendations, Market efficiency, Private information

Journal/Book/Conference Title

Journal of Banking and Finance

Volume

20

Issue

4

First Page

617

Last Page

643

Abstract

This study focuses on stocks mentioned in a Business Week (BW) column in which over half the stories quote an analyst as a source. The results of the study show that stocks with a favorable report in BW earn positive abnormal returns at the time of the distribution of the weekly. However, this is true only for stocks followed by less than twenty analysts. Within this group, the market response increases as the number of analysts decreases. Stocks followed by more than twenty analysts do not respond at the time of their mention in BW. We further document that trading volume increases at the time of the publication of the story. The six-month size-adjusted post-BW performance of the less closely followed stocks with favorable stories is negative and offsets the abnormal return at the time of the BW story. We conclude that the evidence is consistent with the self-fulfilling-prophecy hypothesis, i.e., traders react to BW stories and influence the prices of stocks, only to lose in the long run (six months). The results also show that information obtained from non-analyst sources has a greater impact on stock prices than the information from analyst sources, indicating that some of analysts' information is already reflected in prices through their clients' trading. The return reversion over six months is observed for BW stories with both analyst as well as non-analyst sources.

Department

Department of Finance

Original Publication Date

1-1-1996

DOI of published version

10.1016/0378-4266(95)00025-9

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