Market benefits of greater news dissemination
Jan 09, 2009
How and when information is distributed matters, says scholar
A graduate student in the circle of Freakonomics scholar Steven Levitt has turned his attention to research of interest to IR professionals: the capital markets benefits of disseminating company news.
In a new paper, Eugene Soltes, a doctoral candidate at the University of Chicago Booth School of Business, challenges the assumption that company information is instantly absorbed by the market. Instead, Soltes finds that greater dissemination leads to lower bid-ask spreads, increased share turnover and lower volatility. ‘Ultimately, the results suggest that how information is distributed, even when public, is important,’ he writes in the study.
Soltes traced company press releases from their point of origin and examined the extent and type of news coverage they got. His sample includes all releases from almost all non-financial domestic NYSE, AMEX and NASDAQ firms in the post-Reg FD period from January 1, 2001 to December 2006, a more extensive set of data than used in previous disclosure-related research.
He also interviewed senior editors and executives at leading business media and market-moving news services, including the Wall Street Journal, Thomson Reuters, Dow Jones Newswires and Business Wire, in preparation for his research project.
Soltes says that since the entire set of data on companies is too large to be followed by a single investor, dissemination plays a valuable role in keeping investors informed. Contrary to some economists’ assumptions that corporate information is seamlessly absorbed by market participants, Soltes finds that corporate news does get crowded out on busy political news days and at times when many other companies are also issuing press releases.
While noting that issuers would have no real ability to strategize on when exactly to release news, Soltes shows that on ‘not-busy PR days’, aggregate press coverage for a firm would increase by nearly 10 percent. In other figures, Soltes notes that, based on an average sized trade, a 20 percent increase in press coverage would reduce the average cost of a trade by $1.07. If the average firm’s press coverage rises by 20 percent, share turnover would increase by nearly 5 percent.
Interestingly, his paper gives a boost to the importance of commercial newswires in the financial markets. Since the SEC gave the OK last year to listed firms to bypass newswires in favor of company websites as a place for distributing key corporate news, some predicted the death of newswire service providers. But Soltes’ research suggests that would be a mistake.
‘While I don’t directly examine this in my paper, the implications of the paper do speak to this issue,’ Soltes says. ‘The results of the paper show there are certain capital markets benefits to greater dissemination. Anything that hinders the dissemination process will result in a corresponding decline in those benefits.’
In an ideal world, investors, newswires and journalists would collect this information as
efficiently and rapidly from company websites as from wire service releases, but this is not the case.
‘Obviously, for the big widely followed firms, the Microsofts of the world, people will get the information no matter where it is published,’ Soltes says. ‘For the thousands of small and mid-cap companies, however, it is much less clear that investors would be able to acquire the information as easily if it is simply put on their websites. Few people would want to track dozens of websites to see what new information is out there, although RSS and other new technologies do have the opportunity to change this.’
It’s a cost-benefit consideration for IROs. ‘From the firm’s perspective, there is obviously a cost to issuing a press release with a wire service,’ Soltes adds. ‘But the manager should consider whether this cost is actually greater than the dissemination benefit the firm can be assured of receiving with a wire service.’
By Anna Snider