Good News, Bad News, No News: The Media and the Cross Section of Stock Returns

We examine the relationship between the tonality of news flow and the cross section of expected stock returns. We use a comprehensive definition of media coverage that includes both financial newspapers and mass media, represented by TV broadcasts. Using the total news flow with positive and negative tonality, we build a Media Tonality Indicator (MTI) with higher values reflecting a more positive tonality. Our sample consists of U.S. companies that were constituents of the S&P 500 index from January 2006 to October 2016. We use MTI to sort companies into portfolios and find an average monthly return spread in the order of 3% between the most positive and the most negative MTI-portfolio. This spread amplifies further when a company’s valuation, size or ESG scores are taken into account, disappears however when we use the MTI from the previous month to sort stocks. Foresighted investors can benefit from the tonality premium in overweighting stocks with high valuation, low market capitalization or a high ESG if they expect negative news and vice versa.