Market Reaction to Second-Hand News: Attention Grabbing or Information Dissemination?

This paper deals with a long-standing issue in finance: whether the market reaction to second-hand information is caused by price pressure or by dissemination. We use the perspective of attention grabbing as a particular form of price pressure to analyze the market reaction to the dissemination of analysts’ recommendations through the press. This perspective allows the prediction of an asymmetric market reaction to “buy” and “sell” advice, which has previously been detected in a few other empirical studies but is otherwise difficult to rationalize within the standard price pressure hypothesis. In particular, we analyze the content of a weekly column in the most important Italian financial newspaper that presents past information and analysts’ recommendations on listed companies. In doing so, we find an asymmetric price and volume reaction. Contrary to previous evidence, we document a positive relation between the number of analysts quoted in the column and the price (volume) increase associated with positive recommendations. Because the weekly columns simply attract the attention of investors with no additional new information, it is natural to observe a greater reaction for the most “glamorous” stocks (i.e., the stocks most commonly followed by analysts).