We find that the well-documented underreaction of stock prices to news exhibits substantial time variation, and we use this time variation to investigate the nature of the underreaction. The risk-bearing capacity of financial intermediaries and the degree of passive ownership of stocks are important conditioning variables for how contemporaneous and future prices respond to news. Once we control for likely institutional trading motives, we find the surprising result that stock prices overreact to news. Changing informativeness of news explains a portion but not all of the time variation in the news-returns relationship. The particular association of entropy, a text-based measure of news informativeness, with the news-returns relationship supports our interpretation that strategic institutional trading induces persistent price moves in response to news.
Glasserman, Paul, Fulin Li, and Harry Mamaysky. "Time Variation in the News-Returns Relationship." Columbia Business School, July 16, 2019.
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