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Volume 19, Number 1 / March 2015 , Pages 1-75
Multinational Finance Journal, 2015, vol. 19, no. 1, pp. 1-31
Nicky J. Ferguson , University of Cambridge, UK
Dennis Philip , Durham University Business School, UK    Corresponding Author
Herbert Y. T. Lam , Renmin University of China, China
Jie Michael Guo , Durham University Business School, UK

This paper examines whether tone (positive and negative) and volume of firm-specific news media content provide valuable information about future stock returns, using UK news media data from 1981–2010. The results indicate that both tone and volume of news media content significantly predict next period abnormal returns, with the impact of volume more pronounced than tone. Additionally, the predictive power of tone is found to be stronger among lower visibility firms. Further, the paper finds evidence of an attention-grabbing effect for firm-specific news stories with high media coverage, mainly seen among larger firms. A simple news-based trading strategy produces statistically significant risk-adjusted returns of 14.2 to 19 basis points in the period 2003–2010. At the aggregate level, price pressure induced by semantics in news stories is corrected only in part by subsequent reversals. Overall, the findings suggest firm-specific news media content incorporates valuable information that predicts asset returns.

Keywords : news media content; stock returns; textual analysis; news-based trading strategy
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Multinational Finance Journal, 2015, vol. 19, no. 1, pp. 33-75
Steve Fan , University of Wisconsin - Whitewater, USA    Corresponding Author
Scott Opsal , University of Wisconsin - Whitewater, USA
Linda Yu , University of Wisconsin - Whitewater, USA

In this study, we examine how idiosyncratic risk is correlated with a wide array of anomalies, including asset growth, book-to-market, investment-to-assets, momentum, net stock issues, size, and total accruals, in international equity markets. We use zero-cost trading strategy and multifactor models to show that these anomalies produce significant abnormal returns. The abnormal returns vary dramatically among different countries and between developed and emerging countries. We provide strong evidence to support the limits of arbitrage theory across countries by documenting a positive correlation between idiosyncratic risk and abnormal return. It suggests that the existence of these well-known anomalies is due to idiosyncratic risk. In addition, we find that idiosyncratic risk has less impact on abnormal return in developed countries than emerging countries. Our results support the mispricing explanation of the existence of various anomalies across global markets.

Keywords : anomalies; idiosyncratic risk; international equity markets; limits of arbitrage
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