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08/22/2011

Schrödinger’s Morning Paper: The Impact of Barron's on Stock Prices


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Barron'sBarron’s magazine hits newsstands on the first trading day of the week, and its cover story generally becomes an immediate topic of discussion in the business media, including CNBC, before the exchanges have even opened. Companies featured in Barron’s cover stories experience significant impacts on their stock returns and stock volumes during the first day of trading after publication. What’s more, the markets react to the stories as to brand-new information, and tend to trade on that information very quickly, especially in recent years.

From 1970 to 1987, the impact of Barron’s cover stories on stock returns generally reverberated for a week; from 1988 to 2005, the effects of these articles were confined for the most part to the first day of trading. A 36-year study of Barron’s cover articles not only identifies shifts in the duration of the effect of Barron’s cover stories on stock prices, but it tracks the changing degree to which positive, negative, or neutral coverage of a given company historically affects trading of that company’s stock.

PRECEDENTS

Previous studies have focused on specific features within Barron’s to find evidence of a short-term reaction in securities prices—sometimes only the length of a day (Desai and Jain 2004, 1995; Trahan and Bolster 1995; Benesh and Clark 1994). But there have been no studies that examine companies featured specifically in Barron’s cover stories, and no studies that examine the effect of Barron’s coverage on stock volume. Analyzing stock volume is important because it indicates actual trading in response to information.

This analysis follows the methodology of Arnold, Earl, and North (2007) in categorizing cover stories as positive, neutral, or negative, based on the headline, subhead, and one-sentence summary. A story is positive if a given company has done, plans to do, or is in the process of doing something with a positive connotation. A story is negative if a given company has done, plans to do, or is in the process of doing something with a negative connotation. A cover story is neutral in the absence of any particular qualitative cues about a given company. Although this approach is subjective, the large sample allows for meaningful statistical inferences about the aggregate data.

METHODOLOGY

Exhibit 1Exhibit 1 summarizes the number of publicly traded companies that have been the subject (not always the exclusive subject) of a Barron’s cover story. The tendency of Barron’s to focus on particular companies in its cover stories is somewhat cyclic; the number of articles featuring specific firms varies from as many as 43 to as few as zero within a given year.

Over 36 years, with 52 issues a year, Barron’s should have produced 1,872 covers. This study’s sample of 398 companies was gleaned from a total of 293 covers—just 15.7% of Barron’s cover stories. Generally, the cover story slants positive: 63.6% (253 stories) of the 398 total articles could be characterized as such. Neutral stories represent 14.6% (58) of the total, and negative stories represent 21.9% (87).

To determine the stock market’s reaction to a company that appears on a Barron’s cover, the first day of trading (usually Monday) is analyzed in reference to the stock return and volume of that company. This first-day return is based on the previous day’s (usually Friday’s) closing price and may not be attainable if the investor has to buy or sell at the opening price (the opening price may be different from the previous closing price).

Consequently, in addition to the first-day return, the first-trading-day volume must be investigated in order to reliably determine if the market has truly reacted to the article. If it has, the volume should increase to above normal.

Also of interest are the cumulative stock and volume effects for the following four days (usually Tuesday through Friday). This data should suggest whether investment opportunities continue to accrue after the first day of trading following the publication of the article, or whether all the reaction (assuming there is a reaction) to the article rebounds on the stock price during the first day of trading only.

The stock return is examined as a raw return, a market-adjusted return, and a market-model adjusted return. The market-adjusted return is the raw return minus the CRSP (Center for Research in Security Prices) market-weighted index return. The market-model adjusted return is the raw return minus a market-model expected return. The market-model expected return is based on a regression on the previous 126 trading days and includes the CRSP market-weighted index and four dummy variables to control for possible day-of-the-week effects:

Market-Model Expected Return = α + β × (market return)t + θM × M + θT × T + θW × W + θR × R + error term

The stock volume on publication day is compared to a predicted volume, based on a regression, to produce a measure of abnormal volume (see Sanders and Zdanowicz 1992):

Vt = log (1 + volume on day “t”)

∆Vt = {Vt - Vt-1}

∆Vt = α + β × ∆Vt-1 + θM × M + θT × T + θW × W + θR × R + error term

The model is estimated based on data from the previous 126 trading days. Additionally, volume is compared to volume from the same day of the previous week to control for day-of-the-week effects. For the cumulative four-day volume effect only comparisons using volume from the previous week are utilized.

Note that in both regressions, M, T, W, and R are dummy variables set to one when the day of the week is Monday, Tuesday, Wednesday, or Thursday, respectively, and set to zero otherwise.

RESULTS

Testing based on the means and medians of the return and volume for the first day of trading after a given Barron’s cover story is published indicates that the cover story does affect the stock of the featured company. For all cover stories, both the one-day return and volume are statistically significantly positive on the first day of trading. In addition, firms featured on positive covers experience significantly positive returns and positive abnormal volume. While firms featured on neutral covers have significant positive abnormal volume activity, these firms have positive but not statistically significant one-day returns. Firms featured on negative covers experience significantly negative returns and significantly positive abnormal volume.

The impact of Barron’s on stock returns and volume weakens substantially during the four days following publication (usually Tuesday through Friday). No abnormal trading volume is experienced when all the firms are combined or separated by categorizations of positive, neutral, or negative. For the firms featured on positive covers, there are significant positive raw and market-adjusted returns; however, the market-model adjusted returns are not significant. The firms featured on neutral covers experience no significant cumulative returns. The firms featured on negative covers do experience marginally statistically significant negative returns over the four-day period.

Taken together, the one-day and cumulative four-day returns show that firms featured on positive covers experience a five-day raw return of 2.63% with abnormally positive volume, while firms featured on negative covers experience a five-day raw return of -4.76% with abnormally positive volume, supporting the conjecture that the market does glean brand-new information from the Barron’s coverage. However, a large portion of the reaction occurs during the first day of trading (Exhibit 2).

Exhibit 2: Cover Stories, 1970–2005 (Total Sample)

Exhibit-2

Because 36 years is a long time span and the flow of information in the stock market has certainly improved over time, the data sample is split into two time periods: 1970–1987 (Exhibit 3) and 1988–2005 (Exhibit 4). The impact of both positive and negative stories, relative to return and volume on the first day of trading, is greater in the later than in the earlier period (although the impact in the earlier period is still statistically significant). In the earlier period, the impact of negative stories only appears to be relative to volume, not to return, but that may be the result of a small sample. Only in the later period do neutral stories impact volume on the first day of trading.

Exhibit 3: 1970–1987 (First Half of Sample)

Exhibit-3

Exhibit 4: Cover Stories, 1988–2005 (Second Half of Sample)

Exhibit-4

In the earlier period, the effect of a positive story still emerges in the stock return four days after the first day of trading (except for the market-model adjusted return). This is not the case in the later period, indicating that the market may have become more efficient in incorporating the information the cover story conveys. In other words, today’s more modern market is now able to fully incorporate the information within the first trading day.

However, there is some evidence that the stock return relative to a negative story persists beyond the first day of trading. That suggests that the market has become increasingly optimistic, incorporating positive information more readily than negative information.


–Tom Arnold, PhD, CFA, John H. Earl Jr., PhD, CFA, and David S. North, PhD, are associate professors of finance at the Robins School of Business at the University of Richmond.


REFERENCES

Arnold, Tom, John H. Earl, and David S. North. 2007. “Are Cover Stories Effective Contrarian Indicators?” Financial Analysts Journal, vol. 63, no. 2. 70–75.

Benesh, Gary A., and Jeffrey A. Clark. Spring 1994. “The Value of Indirect Investment Advice: Stock Recommendations in Barron’s.” Journal of Financial and Strategic Decisions, vol. 7, no. 1. 35–43.

Desai, Hemang, and Prem C. Jain. 1995. “An Analysis of the Recommendations of the ‘Superstar’ Money Managers at Barron’s Annual Roundtable.” Journal of Finance, vol. 50, no. 4. 1257–1273.

Desai, Hemang, and Prem C. Jain. March–April 2004. “Long-Run Stock Returns Following Briloff’s Analyses.” Financial Analysts Journal, vol. 60, no. 2. 47–56.

Sanders Jr., Ralph W., and John S. Zdanowicz. 1992. “Target Firm Abnormal Returns and Trading Volume around Initiation of Change in Control Transactions.” Journal of Financial and Quantitative Analysis, vol. 27, no. 1. 109–129.

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