News Selection and Asset Pricing Implications

This paper builds a theoretical framework to endogeneize the editorial decisions of media and analyze their asset pricing implications. The media outlet optimally reports man-bites-dog signals by choosing to report about the firm that generates more uncertainty to investors. There are three main implications of the model. First, the editorial choice is state-dependent and not only has asset pricing implications for reported firms, but also for non-reported firms. Second, the model generates an asymmetric response of asset prices to positive and negative news. Specifically, the asset price reaction is much stronger for negative news than for positive news. Third, public information does not necessarily crowd out the acquisition of private information. Failing to capture the information implications of editorial choices may lead the econometrician to estimate a misspecified asset pricing model. We provide empirical evidence inline with the model predictions.