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Rumor Has It: Sensationalism in Financial Media

Thu, 04 Jun 2015 01:29:32 GMT

The media has an incentive to publish sensational news. We study how this incentive affects the accuracy of media coverage in the context of merger rumors. Using a novel dataset, we find that accuracy is predicted by a journalist's experience, specialized education, and industry expertise. Conversely, less accurate stories use ambiguous language and feature well-known firms with broad readership appeal. Investors do not fully account for the predictive power of these characteristics, leading to an initial target price overreaction and a subsequent reversal, consistent with limited attention. Overall, we provide novel evidence on the determinants of media accuracy and its effect on asset prices.

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