| Summary: | News are the direct channel through which most investors learn about fundamental changes, hence news publishing should have a large impact on asset pricing. However, current literature mostly focuses on the sentiment contained by news and how would it affect investors behavior. The objective of this dissertation, instead, is to study the fundamental information about links between assets that is disclosed in news. Moreover, in an equilibrium where investors delegate their information choices to news editors, the partial coverage decisions on such information can unveil the current economy condition and the co-movement between assets.
Chapter 2 shows that the business news is a rich source of data on distressed firm links that drive firm-level and aggregate risks. The news tends to report about links in which a less popular firm is distressed and may contaminate a more popular firm. This constitutes a contagion channel that yields predictable returns and downgrades. Shocks to the degree of news-implied firm connectivity predict increases in aggregate volatilities, credit spreads, and default rates, and declines in output.
Chapter 3 further shows that peer linkages instead can be found in news on cryptocurrencies. Such linkages induce significant price co-movement in crypto markets in excess of common risk factors and correlated demand shocks. When large abnormal return shocks hit one crypto, its peers experience unusually large abnormal returns of the opposite sign. These effects are primarily concentrated among smaller peers and revert after several weeks, resulting in predictable returns. Trading strategies can be developed to exploit this reversal, and they are significantly profitable even after accounting for trading frictions.
Chapter 4 on the other hand suggests that news editors have state-dependent preferences for different types of firms. Moreover, firms with high editor preference earn higher returns than those with low preferences, on average. This is consistent with the theory positing that if investors delegate their information selection to news editors, the state-dependent coverage decisions signal risky features and hence covered firms require more risk compensation. The annualized excess return of around 12% due to coverage cannot be explained by standard risk factors. This excess is also present among non-covered firms but is more short-lived.
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