The well-documented underreaction of stock prices to news exhibits substantial time variation. We show that higher risk-bearing capacity of financial intermediaries and lower passive ownership of stocks increase price responses to lagged news (underreaction), while also increasing price responses to contemporaneous news. Short-sale constraints, serial correlation in news flow, and changing informativeness of news, measured by entropy, account for a portion of our findings. Strategic trading by institutions offers the simplest and most comprehensive account consistent with our empirical results about the news-returns relationship.
Glasserman, Paul, Fulin Li, and Harry Mamaysky. "Time Variation in the News-Returns Relationship." Columbia Business School, July 16, 2019.
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