A Firm-Specific Study of the Impact of Media Coverage on Capital Flow

Abstract

This study aims to investigate whether and how firm-specific media coverage can impact the capital flow decisions of investors in China's stock market. The media dataset includes articles about 42 listed financial companies that were published in three major securities newspapers from 2004 through 2013. A multidimensional perspective analysis is chosen to capture both the amount and content sentiment of media coverage. Specifically, the quantity model is built to investigate the impact of article amount on capital flow, while the quality model aims to capture the difference in media impact between positive news and negative news. In order to control the unobserved heterogeneity of firms, fixed effects model is employed. Our empirical analysis demonstrates that media coverage can significantly influence the capital flow decisions of investors; this holds for both the quantity aspect and the quality aspect. The quantity model shows that after controlling for risk factors such as size and book-to-market ratio, more capital flow will be allocated to the high-return stocks with high media coverage. The quality model finds that stocks with positive media coverage will be allocated more capital flow than those with negative media coverage, given an identical stock return. Furthermore, a simple but effective identification strategy is constructed to explore the mechanism behind this media coverage and capital flow relationship. Our results suggest that the information view does not offer sufficient explanation power; instead media coverage tends to be more about "attention-grabbing" than conveying information.