Published online by Cambridge University Press: 15 November 2023
The speed of stock price reaction to news exhibits substantial time variation. Higher risk-bearing capacity of financial intermediaries, lower passive ownership of stocks, and more informative news increase price responses to contemporaneous news; surprisingly, these interaction variables also increase price responses to lagged news (underreaction). A simple model with limited attention and three investor types (institutional, noninstitutional, and passive) predicts the observed variation in news responses. A long–short trading strategy based on news sentiment earns high returns, which increase when conditioning on the interaction variables. The interactions we document are robust to the choice of news source.
This article has been updated since its original publication: https://doi.org/10.1017/S0022109024000620.
We thank an anonymous referee, Hendrik Bessembinder (the editor), Zhiguo He, John Heaton, Ralph Koijen, Lubos Pastor, and seminar participants at Baruch College, Chicago Booth, Columbia University, Cornerstone Research, De Nederlandsche Bank, the Society of Quantitative Analysts, the University of Maryland, and Yale University for helpful comments and suggestions. We thank Patrick Wu for valuable research assistance and the Financial Times for providing their news archive for this study.
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