Underreaction to News in the US Stock Market

Abstract

Using a score that quantifies the tone of news articles, I construct a weekly measure of qualitative information that predicts returns over the next 13 weeks. A portfolio long stocks with past positive tone and short stocks with past negative tone has an average return of 16.54 basis points per week (8.60% per year). The findings suggest the market underreacts to the content of news articles. The underreaction is not constrained to small stocks, low analyst-coverage stocks, low institutional ownership, or loser stocks. The findings also suggest the tone of news articles is different from sentiment which is assumed to have no permanent impact on stock prices.

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