Media Abnormal Tone and Cross-Section of Stock Returns : Evidence from China

This paper proposes a novel approach to extract information from textual data for explaining cross-sectional stock returns, which overcomes the deficiencies of the traditional media tone measurement. We observe that firms with high media abnormal tone generate lower future returns than those with low media abnormal tone in the Chinese market. This negative relation is robust when controlling for common risk factors. These results are more pronounced among firms with low investment, high short-term reversal and value firms. We find that the negative premium induced by media abnormal tone is related to mispricing. The results show that investors tend to overreact to the media abnormal tone, although it indeed disseminates concurrent information of firms. In addition, media following suit exacerbates this investor overreaction