Press Coverage and Stock Prices' Deviation from Fundamental Value

Previous literature has provided mixed views on the role of press coverage on market efficiency. On the positive side, it can function as an external disciplinary mechanism that improves corporate governance or as an information intermediary that provides relevant information to a wide audience. On the negative side, media coverage may be inherently biased or a source of judgment biases and sentiment. Using a large hand-collected database of newspaper articles from 1995 to 2004, we find that abnormal press coverage of public firms significantly exaggerates mispricing. Collectively, these results are consistent with the notion that abnormal press coverage generates strong sentiment among investors that is likely to cause the firm's stock to be mispriced. We find that, among firms with uncharacteristically high print media coverage, underpriced firms outperform overpriced firms by more than one percent per month on a risk adjusted basis. When we examine signed mispricing, we find that the effect of abnormal press coverage is more pronounced for overpriced than for underpriced firms, which is consistent with both media bias and the combination of media generated sentiment with binding short-selling constraints. We show that even though both effects co-exist, the media sentiment effect is more pervasive.