The Long-Run Role of the Media: Evidence from Initial Public Offerings

The unique characteristics of the U.S. initial public offering IPO process, particularly the strict quiet period regulations, allow us to explore the effects of media coverage when the coverage does not contain genuine news i.e., hard information that was previously unknown. We show that a simple, objective measure of pre-IPO media coverage is positively related to the stock's long-term value, liquidity, analyst coverage, and institutional investor ownership. Our results are robust to additional controls for size, to using abnormal or excess media, and to an instrumental variable approach. We also find that pre-IPO media coverage is negatively related to future expected returns, measured by the implied cost of capital. In all, we find a long-term role for media coverage, consistent with Merton's attention or investor recognition hypothesis. This paper was accepted by Brad Barber, finance.

[1]  Laura Veldkamp,et al.  Information Immobility and the Home Bias Puzzle , 2005 .

[2]  Guy J. Golan,et al.  Second-Level Agenda Setting in the New Hampshire Primary: A Comparison of Coverage in Three Newspapers and Public Perceptions of Candidates , 2001 .

[3]  E. Elton.  Expected return, realized return, and asset pricing tests , 1999 .

[4]  Toni M. Whited,et al.  Endogeneity in Empirical Corporate Finance1 , 2013 .

[5]  Richard D. Long.  Stock Price Reaction to Public and Private Information , 2007 .

[6]  Ambrus Kecskés.  Initial Public Offerings: The Origin of Investor Recognition? , 2009 .

[7]  A. Hoffman,et al.  Not All Events are Attended Equally: Toward a Middle-Range Theory of Industry Attention to External Events , 2001 .

[8]  M. E. Ellis.  Globalization, Corporate Finance, and the Cost of Capital , 2000 .

[9]  Malcolm P. Baker,et al.  Investor Sentiment and the Cross-Section of Stock Returns , 2003 .

[10]  Kewei Hou,et al.  Market Frictions, Price Delay, and the Cross-Section of Expected Returns , 2003 .

[11]  Lu Zhang,et al.  Do Anomalies Exist Ex Ante? , 2013 .

[12]  Gregory S. Miller,et al.  Investor Relations, Firm Visibility, and Investor Following , 2007 .

[13]  Gustavo Grullon,et al.  Advertising, Breadth of Ownership, and Liquidity , 2004 .

[14]  Daniel Dorn,et al.  Does Sentiment Drive the Retail Demand for IPOs? , 2003, Journal of Financial and Quantitative Analysis.

[15]  Donghang Zhang.  Why Do IPO Underwriters Allocate Extra Shares when They Expect to Buy Them Back , 2004 .

[16]  E. Fama,et al.  Industry costs of equity , 1997 .

[17]  M. Mitchell,et al.  The Impact of Public Information on the Stock Market , 1994 .

[18]  Laura Casares Field,et al.  The Expiration of IPO Share Lockups , 2000 .

[19]  Donald W. K. Andrews,et al.  Identification and Inference for Econometric Models , 2005 .

[20]  Terence Lim,et al.  Bad News Travels Slowly: Size, Analyst Coverage and the Profitability of Momentum Strategies , 1998 .

[21]  Gerald M. Kosicki.  Problems and Opportunities in Agenda‐Setting Research , 1993 .

[22]  A. Khorana,et al.  Is There Life after the Complete Loss of Analyst Coverage? , 2012 .

[23]  Walter W. Powell,et al.  Cultivating an institutional ecology of organizations: comment on Hannan, Carroll, Dundon, and Torres , 1995 .

[24]  Paul C. Tetlock,et al.  All the News That's Fit to Reprint: Do Investors React to Stale Information? , 2010 .

[25]  R. C. Merton,et al.  Presidential Address: A simple model of capital market equilibrium with incomplete information , 1987 .

[26]  A. Purnanandam,et al.  Are Ipos Really Underpriced? , 2002 .

[27]  Alex W. H. Chan.  Merton, Robert C. , 2010 .

[28]  M. Lowry,et al.  Institutional versus Individual Investment in IPOs: The Importance of Firm Fundamentals , 2005, Journal of Financial and Quantitative Analysis.

[29]  M. Brennan,et al.  Investment Analysis and the Adjustment of Stock Prices to Common Information , 1993 .

[30]  Zhihong Chen,et al.  Agency Costs of Free Cash Flow and the Effect of Shareholder Rights on the Implied Cost of Equity Capital , 2009, Journal of Financial and Quantitative Analysis.

[31]  Charles M. C. Lee,et al.  Toward an Implied Cost of Capital , 2000 .

[32]  Ron Kaniel,et al.  Headlines and Bottom Lines: Attention and Learning Effects from Media Coverage of Mutual Funds , 2005 .

[33]  J. Ritter,et al.  The Marketing of Seasoned Equity Offerings , 2010 .

[34]  Ashutosh Kumar Singh,et al.  Underwriter Reputation, Initial Returns, and the Long‐Run Performance of IPO Stocks , 1998 .

[35]  Joseph Engelberg,et al.  The Causal Impact of Media in Financial Markets , 2009 .

[36]  C. Leuz,et al.  Cost of Capital Effects and Changes in Growth Expectations Around U.S. Cross-Listings , 2008 .

[37]  Robert A. Van Ness,et al.  On the Marketing of IPOs , 2006 .

[38]  Paul C. Tetlock,et al.  How Wise Are Crowds? Insights from Retail Orders and Stock Returns , 2012 .

[39]  Diego Garcia,et al.  Journalists and the Stock Market , 2011 .

[40]  Ann E. Sherman,et al.  Endogenous Entry and Partial Adjustment in IPO Auctions: Are Institutional Investors Better Informed? , 2009 .

[41]  Ann E. Sherman,et al.  Do Investors Learn from Experience? Evidence from Frequent IPO Investors , 2010 .

[42]  Charles J. Fombrun,et al.  Reputation: Realizing Value from the Corporate Image , 1996 .

[43]  E. López-Escobar,et al.  Candidate Images in Spanish Elections: Second-Level Agenda-Setting Effects , 1997 .

[44]  Peter Easton,et al.  Pe Ratios, Peg Ratios, and Estimating the Implied Expected Rate of Return on Equity Capital , 2003 .

[45]  René M. Stulz,et al.  Is the IPO pricing process efficient , 2004 .

[46]  Thomas D. Berry,et al.  Public Information Arrival , 1994 .

[47]  Marcin T. Kacperczyk,et al.  Competition and Bias , 2008 .

[48]  Paul C. Tetlock.  Does Public Financial News Resolve Asymmetric Information? , 2010 .

[49]  James A. Ohlson,et al.  Expected EPS and EPS Growth as Determinantsof Value , 2005 .

[50]  Francisco Pérez-Gónzalez,et al.  Inside the Family Firm: The Role of Families in Succession Decisions and Performance , 2006 .

[51]  Maureen O'Hara,et al.  The Accuracy of Trade Classification Rules: Evidence from NASDAQ , 2000 .

[52]  Andriy Bodnaruk,et al.  Does investor recognition predict returns , 2008 .

[53]  J. Ritter.  The Long-Run Performance of Initial Public Offerings , 1991 .

[54]  Brad M. Barber,et al.  All that Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors , 2006 .

[55]  Toni M. Whited,et al.  Endogeneity in Empirical Corporate Finance , 2011 .

[56]  Zhi Da,et al.  In Search of Attention , 2009 .

[57]  Philipp Schmitz,et al.  Market and Individual Investors Reactions to Corporate News in the Media , 2007 .

[58]  D. Hirshleifer,et al.  Driven to Distraction: Extraneous Events and Underreaction to Earnings News , 2007 .

[59]  James A. Ohlson,et al.  Expected EPS and EPS Growth as Determinants of Value By , 2000 .

[60]  P. Raghavendra Rau,et al.  Is There Life after the Complete Loss of Analyst Coverage , 2013 .

[61]  G. Bassett,et al.  Analysts' Selective Coverage and the Long-term Performance of Newly Public Firms , 2004 .

[62]  Kent L. Womack,et al.  Strategic IPO Underpricing, Information Momentum, and Lockup Expiration Selling , 2001 .

[63]  Stephen E. Erfle,et al.  Media, Political Pressure, and the Firm: The Case of Petroleum Pricing in the Late 1970s , 1990 .

[64]  C. Leuz,et al.  The Rodney L. White Center for Financial Research International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regulation Matter? , 2022 .

[65]  Sofus A. Macskassy,et al.  More than Words: Quantifying Language to Measure Firms' Fundamentals the Authors Are Grateful for Assiduous Research Assistance from Jie Cao and Shuming Liu. We Appreciate Helpful Comments From , 2007 .

[66]  W. S. Chan,et al.  Stock Price Reaction to News and No-News: Drift and Reversal after Headlines , 2001 .

[67]  Ann E. Sherman,et al.  Building the IPO Order Book: Underpricing and Participation Limits with Costly Information , 2000 .

[68]  Utpal Bhattacharya,et al.  The Role of the Media in the Internet IPO Bubble , 2007, Journal of Financial and Quantitative Analysis.

[69]  Joel Peress,et al.  Media Coverage and the Cross-Section of Stock Returns , 2008 .

[70]  Alexander Ljungqvist,et al.  The Value of Research , 2007 .

[71]  Kimberly D. Elsbach.  MANAGING ORGANIZATIONAL LEGITIMACY IN THE CALIFORNIA CATTLE INDUSTRY - THE CONSTRUCTION AND EFFECTIVENESS OF VERBAL ACCOUNTS , 1994 .

[72]  Timothy G. Pollock,et al.  Media Legitimation Effects in the Market for Initial Public Offerings , 2003 .

[73]  Kent L. Womack,et al.  Adds and drops of coverage by equity research analysts , 2008 .

[74]  K. Wei,et al.  Price and earnings momentum: An explanation using return decomposition , 2014 .

[75]  Sadaf Aliuddin.  Who Writes the News? Corporate Press Releases during Merger Negotiations , 2014 .

[76]  Elizabeth Demers,et al.  The Marketing Role of Ipos: Evidence from Internet Stocks , 2001 .

[77]  Chenchuramaiah T. Bathala.  Giving Content to Investor Sentiment: The Role of Media in the Stock Market , 2007 .

[78]  Terrence Hendershott,et al.  Liquidity Externalities and Adverse Selection: Evidence from Trading after Hours , 2004 .

[79]  Paul C. Tetlock,et al.  How Wise Are Crowds? Insights from Retail Orders and Stock Returns: Retail Orders and Stock Returns , 2013 .

[80]  R. Lund.  Identification and Inference for Econometric Models: Essays in Honor of Thomas Rothenberg , 2006 .

[81]  Jacob K. Thomas,et al.  Equity Premia as Low as Three Percent? Evidence from Analysts' Earnings Forecasts for Domestic and International Stock Markets , 2001 .

[82]  The Long-Run Role of the Media: Evidence from Initial Public Offerings , 2013 .

[83]  Ľuboš Pástor,et al.  Estimating the Intertemporal Risk-Return Tradeoff Using the Implied Cost of Capital , 2006 .

[84]  R. Banz,et al.  The relationship between return and market value of common stocks , 1981 .

[85]  René M. Stulz,et al.  GOLBALIZATION, CORPORATE FINANCE, AND THE COST OF CAPITAL , 1999 .