Online from: 1975
Subject Area: Accounting and Finance
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|Title:||Does local news matter to investors?|
|Author(s):||Shreesh Deshpande, (School of Business Administration, University of San Diego, San Diego, California, USA), Marko Svetina, (School of Business Administration, University of San Diego, San Diego, California, USA)|
|Citation:||Shreesh Deshpande, Marko Svetina, (2011) "Does local news matter to investors?", Managerial Finance, Vol. 37 Iss: 12, pp.1190 - 1212|
|Keywords:||Analysts' forecasts, Earnings, Home bias, Local bias, Local news, Quarterly earnings, Stock returns, United States of America|
|Article type:||Research paper|
|DOI:||10.1108/03074351111175092 (Permanent URL)|
|Publisher:||Emerald Group Publishing Limited|
|Acknowledgements:||JEL classification – G11, G14, G30, H31. The authors thank Tom Copeland, Ryan McKeon, Phil Zhu, and seminar participants at the University of San Diego for their comments; also Alan Gin for providing time series data on the San Diego Leading Economic Indicator Index. The authors are grateful for the insightful comments and suggestions of the three anonymous reviewers. The usual disclaimers apply.|
Purpose – Recent research on local bias provides evidence that investors' portfolios include a non-negligible allocation to stocks in firms that are geographically proximate to the investors. The reasons postulated for local bias include familiarity with firms, “word-of-mouth” communication effects, and ability to exploit local news. The purpose of this paper is to investigate the value-relevance of local news, specifically earnings announcement surprises, in the context of the well-documented local bias in investors' portfolios.
Design/methodology/approach – Using a hand-collected panel dataset spanning 15 years of quarterly earnings announcements of publicly traded firms, abnormal stock returns engendered by earnings surprises based on local newspaper announcements are compared to those from earnings surprises based on financial analysts' forecasts (I/B/E/S).
Findings – In contrast to the case, when both sources of earnings surprises are negative, the authors find a statistically significant differential stock price effect in a sample where local firms' earnings announcements in the local newspaper signal positive earnings surprises, but the earnings surprise based on financial analysts' forecasts is negative. This result remains after controlling for time- and firm-fixed effects. In additional tests, the authors establish that the result is predicated on a local firm's earnings announcement being reported in the local newspaper.
Originality/value – The paper's findings suggest that the results of empirical research on the information content of earnings surprises based solely on analysts' forecasts should be interpreted with caution. It was found that the stock price impact of earnings surprises is also significantly influenced by local newspaper reports of the announced quarterly earnings of local firms.
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