Did the Media Help to Inflate the Stock Market Bubble?
With the image of Jim Cramer hawking stocks fresh in people’s heads, there is a widespread belief that the media contributes to and inflates asset bubbles like the stock market run-up. But a new study published in the Journal of Financial and Quantitative Analysis argues that the media does not play such an outsized role, or at least it didn’t during the dotcom bubble of the early ’90s.
The study looked at news articles published from 1996 to 2000 on 458 Internet initial public offerings and 458 non-Internet public offerings. In total, 171,488 relevant news items were examined and classified as good news, neutral news or bad news.
As might be expected, during the boom news articles about dotcom IPOs were more positive than similar articles about non dotcom IPOs. The media was also more negative on Internet companies during the bust than it was on the non-dotcommers.
However, after a couple of days the effect of the media on new ordering prices was negligible. The report concludes:
[M]edia coverage was not a significant factor in the Internet bubble. The media explains only 2.9% of the difference in between Internet and non-Internet firm returns from January 1, 1997 to March 24, 2000 (the day the Nasdaq peaked).
Apparently the market discounted media sentiment when pricing stocks. Was this same dynamic at work in the most recent market rally? We’ll have to wait for another study to find out.