This is the tile of a 2014 paper by Prof. Diego Garcia of the University of North Carolina, in which heanalyzes the relationship between recent behavior of the stock market and subsequent reporting in financial newspapers.
Conventional wisdom holds that reporters’ articles mirror and perhaps intensify the tone of the recent past. That is to say, they are unduly bearish when the stock market has been making losses, and similarly unduly bullish when it has been making gains.
Prof. Garcia, studying Wall Street as reflected in the Wall Street Journal and the New York Times from 1920 to 2005, draws a different conclusion. He writes:
“…the asymmetry of journalists’ writing is pervasive: it has barely changed from the 1920s to the 1990s, and virtually all authors exhibit the same pattern, emphasizing negative returns, ignoring large positive market moves.”
Why should financial reporting have a negative bias?
The first thing that comes to my mind is television and radio weather people, who have a strong tendency to predict more precipitation than the US Weather Service, the government body from which they derive their data, says will happen. How so? Media weather people know that talking about looming bad weather has more entertainment value than a more benign forecast. Also, viewers/listeners feel relieved if the forecast is for rain and the day is sunny instead. They only get angry if the forecast is for fair weather and it ends up pouring. Therefore, media weather people have every business/career reason to shade their forecasts heavily toward more precipitation rather than less.
John Authers, a reporter from the Financial Times from whom I learned about Prof. Garcia’s paper, gives more or less the same rationale for the similar phenomenon with newspapers.
–if the default position of a newspaper writer is to write a negative story, then we probably get no investment information from it. On the other hand, if the story is positive, it’s unusual enough that we should look into the company or industry being reported on as a possible investment idea.
–Mr. Authers illustrates the risks to a journalist of making a positive recommendation. Better, he says, to recommend not buying Amazon and watch it double than to run the risk of a loss. Suppose the positive recommendation turn out to be Enron?
Of course, anyone in his right mind who read the Enron financials would have stayed as far away from that company as possible (yes, a couple of less-skilled colleagues at my last firm were, incomprehensibly to me, quite eager to buy the stock just before it imploded–and, yes, I did buy a stock certificate before it was delisted at $.80 or so as a souvenir–but that’s another story). Reporters are trained journalists, however, not securities analysts. They typically don’t have the economics, accounting or finance background to do analysis (although Mr. Authers does have an MBA from Columbia). Nor do they have the time. So the risk they run by saying something positive about a company is enormously high.
–An aside: oddly enough, one of the first steps in training a growth stock analyst is to question this common sense attitude that avoiding all possibility of loss is the highest virtue. For growth investors, finding a stock that can triple is.
–this study is only of US newspapers. In my experience, reporters for the Financial Times are much more highly skilled than their US paper counterparts.