Study: Readers expect stock prices to rise based on positive news coverage, and vice versa

Readers of financial news are more likely to expect that a company’s stock price will rise if they read a story about a company with positive modifying words, according to research published in the Journal of Economic Behavior and Organization.

Researchers at the University of Amsterdam and the University of Luxembourg asked subjects to estimate the future stock prices of 12 companies based on the historical prices of each stock and a newspaper article published about the company in the New York Times and Financial Times. Some readers were given articles that included positive references while other readers were given articles that included negative references.

“Our results show that subjects on average expect a significantly higher (lower) future stock return after reading news that highlight positive (negative) and attenuate negative (positive) facts,” according to the study.

The researchers argue that the news media may be able to manipulate an investor’s perception of the content of financial news by drawing readers’ attention to one fact “while taking it away from another via salient stimuli such as modifier words.”

The study found a bigger effect when the subjects read an article with a negative reference. Readers expected a bigger stock price movement — albeit downward — after reading those articles.

“We suggest that when stocks perform poorly, subjects search for additional salient hints in the news media in order to predict the next period price and are more prone to react to modifier words,” the study states.

For a copy of the study, go here.