Unusual News Flow and the Cross Section of Stock Returns

Turan G. Bali (), Andriy Bodnaruk (), Anna Scherbina () and Yi Tang ()
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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

Management Science, 2018, vol. 64, issue 9, 4137-4155

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.

Keywords: unusual news flow; volatility shocks; short-sale constraints; market efficiency (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (11)

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