News Sensitivity and the Cross-Section of Stock Returns

The paper is the first one outside the high-frequency domain to use sentiment-signednews to directly compare news and no-news stock returns. This is done by estimatingwhether returns on positive, neutral and negative news days are significantly differentfrom the average daily return for a large sample of US stocks over the period fromJanuary 2003 to August 2010. The general results show that positive news days indeedhave above-average returns and negative news days returns are below average, whilethe neutral news days are economically barely distinguishable from the average. Themarket also proves to be fast and accurate at pricing new information, as there areno signs of drift shortly after news days. On the contrary, a directionally correct andstatistically significant movement can be found on the day before the news day. Thecross-sectional analysis reveals significant differences in the strength of market reactionsbetween stocks ranked on size, book-to-market or news coverage. The general resultshowever hold across all subsamples and are also not driven by earnings announcementsor past stock returns. Moreover, the average news sensitivity is itself a priced sourceof risk. A portfolio of stocks with high sensitivity to news outperforms a portfolio ofstocks with low sensitivity by a statistically and economically significant 0.84% permonth. This news premium seems to primarily relate to the high impact of news insituations of general uncertainty.[...]