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Unusual News Flow and the Cross Section of Stock Returns

Author

Listed:
  • Turan G. Bali

    (McDonough School of Business, Georgetown University, Washington, DC 20057)

  • Andriy Bodnaruk

    (College of Business Administration, University of Illinois at Chicago, Chicago, Illinois 60607)

  • Anna Scherbina

    (Graduate School of Management, University of California at Davis, Davis, California 95616, International Business School, Brandeis University, Waltham, Massachusetts 02453)

  • Yi Tang

    (Gabelli School of Business, Fordham University, New York, New York 10023)

Abstract

We document that stocks that experience sudden increases in idiosyncratic volatility underperform otherwise similar stocks in the future, and we propose that this phenomenon can be explained by the Miller conjecture [Miller E (1977) Risk, uncertainty, and divergence of opinion. J. Finance 32(4):1151–1168]. We show that volatility shocks can be traced to unusual firm-level news flow, which temporarily increases the level of investor disagreement about the firm value. At the same time, volatility shocks pose a barrier to short selling, preventing pessimistic investors from expressing their views. In the presence of divergent opinions and short-selling constraints, prices initially reflect optimistic views but adjust downward in the future as investors’ opinions converge.

Suggested Citation

  • Turan G. Bali & Andriy Bodnaruk & Anna Scherbina & Yi Tang, 2018. "Unusual News Flow and the Cross Section of Stock Returns," Management Science, INFORMS, vol. 64(9), pages 4137-4155, September.
    • Handle: RePEc:inm:ormnsc:v:64:y:2018:i:9:p:4137-4155
    DOI: 10.1287/mnsc.2017.2726
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    6. Jeon, Yoontae & McCurdy, Thomas H. & Zhao, Xiaofei, 2022. "News as sources of jumps in stock returns: Evidence from 21 million news articles for 9000 companies," Journal of Financial Economics, Elsevier, vol. 145(2), pages 1-17.
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