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

This paper measures the media abnormal tone based on novel textual data in China and investigates its predictive power in cross-sectional stock returns. We observe that firms with high media abnormal tone generate lower future returns than those with low media abnormal tone. 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