Week 6 - Fang, L. H., Peress, J., and Zheng, L. (2014). Does media coverage of stocks affect mutual funds’ trading and performance?

Question 1

What is the main idea of this paper?

Answer 1

• Attention is a scarce resource, while a wide range of options are open, those covered by attention are more likely to be exploited
  o Barber & Odean (2008): Individuals are net buyers of attention-grabbing stocks
  o Engelberg & Parsons (2011): Local media coverage predicts local trading behaviours
  o Da, Engelberg & Gao (2011): Google search intensity predicts stock movements and price reversals
• Abundant resources: Institutions have more capacity to process information; mass print media is slower than professional networks; in an efficient market, trade performance should not be related to mass print media
• Limited attention: Institutional managers attention is limited and may be influenced by the media; shortage of cognitive capacities results in inferior trading

Question 2

What are the main findings of this paper?

Answer 2

• Media coverage measure: number of articles posted stocks in major daily newspapers
• Dependent variable: For each stock, dollar value of fund’s buys in each quarter scaled by fund’s total net
  assets.
• More media coverage is associated with more buys; however, the selling behaviour cannot be explained
• Another study shows that media coverage affects both buys and sells, including hedge funds and other type of institutional investors
• Hedge funds seem to sell high coverage stocks
• Based on the CAPM model: Funds in the top Propensity buy media decile underperform funds in the lowest decile by 2.8%; no relation on the sell side
• Flow catering hypothesis (Solomon, Soltes & Suyra 2012): investors are attracted to media covered stocks, and they channel money into funds which hold these stocks
  o Fund managers caters investors’ taste
  o However, this has limited impact on future inflows

Question 3

What is the conclusion?

Answer 3

• Mutual funds tend to buy heavily covered stocks; selling behaviour cannot be explained by such coverage
• Negative relation between funds’ propensity to buy media covered stocks and their performance across the cross section
• Attention is limited even for professionals