There is no Such Thing as Good Publicity An Empirical Study of the Link between Media Coverage and Stock Returns Master’s Thesis M.Sc. Finance and Investments & M.Sc. Applied Economics and Finance Copenhagen Business School, 15.05.2018 Characters: 200,079 Pages: 119 Supervisor: Tim Mondorf Jesper Rolfsen Kenneth Aakernes 106055 108190 __________________ ____________________ Abstract The purpose of this thesis is to investigate whether there exists a return differential among stocks with low and high news and Twitter publication on S&P 500 and OSEAX. Based on the findings, this paper aims to build a simple investment strategy with the objective of challenging the return provided by the market. The media effect among stocks is analyzed using statistical tests for cross-sectional data and time series regression. The investment strategy tests for different holding periods. We find that stocks with little exposure to news and Twitter publications earn considerably higher returns than those with a high level. The effect is prominent among American value stocks and Norwegian growth stocks as well as small stocks. After a month of weak stock performance in OSEAX, the highly covered stocks continue the negative path, while stocks with low coverage tend to reverse the next month. The return difference holds even after controlling for risk factors, however with little statistical evidence. A zero-investment portfolio of Norwegian stocks sorted by media coverage adjusted for firm size earns a substantially greater return than its benchmark index, holding positions for one month at a time. Over our sample period, the monthly-rebalanced zero-investment portfolio outperforms the OSEAX by 4,424 basis points, even after adjusting for transaction costs. Our results imply that it should be possible for both institutional and retail investors to allocate stocks in their portfolio based on media exposure, to obtain risk-adjusted returns. Moreover, asset managers should be aware of stocks with abnormal amounts of media coverage. Abbreviations NPC – News Publication Count TPC – Twitter Publication Count APC – Aggregate Publication Count ZIP – Zero-Investment Portfolio CAPM – Capital Asset Pricing Model FF3 – Fama-French Three-Factor Model FF5 – Fama-French Five-Factor Model C4F – Carhart Four-Factor Model PS5 – Pastor-Staumbaugh Liquidity Factor Mkt-rf – Market Return in Excess of Risk Free Rate SMB – Small Minus Big HML – High Minus Low UMD – Up minus Down LIQ –Liquidity Factor RMW – Robust Minus Weak CMA – Conservative Minus Aggressive P/B – Price-to-book ratio OLS – Ordinary Least Square Table of Contents 1 Introduction ..................................................................................................................................... 1 1.1 The Media Coverage Environment .......................................................................................... 1 1.2 Research Question .................................................................................................................. 2 1.3 Delimitations ........................................................................................................................... 3 1.4 Research Design and Methodology ......................................................................................... 3 1.5 Structure of Thesis ................................................................................................................... 6 2 Practical Investment Implications and assumptions ....................................................................... 8 2.1 Short Sale ................................................................................................................................. 8 2.2 Zero-Investment Portfolio ....................................................................................................... 9 2.3 Tax and transaction costs ...................................................................................................... 10 2.4 Assumptions .......................................................................................................................... 11 3 Financial theory and Literature ..................................................................................................... 13 3.1 Efficient Market Hypothesis .................................................................................................. 13 3.1.1 Weak-form efficiency .................................................................................................... 14 3.1.2 Semi-strong-form efficiency .......................................................................................... 14 3.1.3 Strong-form efficiency ................................................................................................... 15 3.2 The predictability of asset returns ........................................................................................ 15 3.2.1 Random Walk ................................................................................................................ 15 3.2.2 Martingale ..................................................................................................................... 16 3.3 Behavior Finance ................................................................................................................... 17 3.4 Asset Pricing Models ............................................................................................................. 19 3.4.1 Capital Asset Pricing Model ........................................................................................... 19 3.4.2 Fama-French Three-Factor Model ................................................................................. 22 3.4.3 The Carhart Four-Factor Model ..................................................................................... 23 3.4.4 The Fama-French Five-Factor Model............................................................................. 24 4 Empirical Review ........................................................................................................................... 26 5 Data Collection .............................................................................................................................. 31 5.1 Data Presentation .................................................................................................................. 31 5.2 Bloomberg ............................................................................................................................. 32 5.3 Twitter ................................................................................................................................... 33 5.4 Bloomberg’s News and Twitter Publication Count ............................................................... 34 i 6 Methodology ................................................................................................................................. 36 6.1 What causes Aggregate Publication Count ........................................................................... 36 6.2 Univariate Analysis ................................................................................................................ 38 6.3 Multivariate analysis ............................................................................................................. 41 6.4 Practical approach ................................................................................................................. 43 7 Statistical Implications ................................................................................................................... 45 7.1 Regression methodology ....................................................................................................... 45 7.2 Interpretation of results ........................................................................................................ 46 7.3 OLS Assumptions ................................................................................................................... 47 7.3.1 Linearity of the model parameters................................................................................ 48 7.3.2 Multicollinearity ............................................................................................................ 49 7.3.3 Heteroscedasticity ......................................................................................................... 50 7.3.4 Autocorrelation ............................................................................................................. 52 7.3.5 Normally Distributed Errors .......................................................................................... 54 8 Analysis .......................................................................................................................................... 55 8.1 Descriptive Statistics ............................................................................................................. 55 8.2 What Causes APC .................................................................................................................. 60 8.3 NPC, TPC and the Cross-Section of Stock Returns ................................................................. 65 8.3.1 Univariate Analysis ........................................................................................................ 65 8.3.2 Multivariate Analysis ..................................................................................................... 72 9 Practical approach ........................................................................................................................