When taking a quick look through amplification mechanisms previously, we have acknowledged that investors tend to be more confident after seeing the price increase and they often expect this rise to continue in long-term. The news media, having noticed the upward trend on the market, try to gather performance status of glamorous stocks over latest months and publish something that could make people believe they will make a fortune by investing in (Shiller, 2015). This action can, and actually did, help news providers draw in more customers, but at the same time faultily give their customers insufficient information. In fact, a study in the extrapolation of past earnings growth has shown that “for glamour stocks having high earnings growth over the past five years, their superior performance continues for only two years” after (Ivanov, 2018). Here we can pose a question that was the news media’s stories a part of what made those stocks thrive? And if it was then how about when they started to go down the drain? Another method the news media use to catch investors’ attention, which also unexpectedly impels the market, is to point at a controversial idea and try to nudge people by involving an expert’s support. In 1987, the writer of the book named The Great Depression of 1990: Why It’s Got to Happen, How to Protect Yourself – Ravi Batra – appeared on an American daily news program and voiced his prediction of a new, upcoming catastrophic crash at the end of the decade (Shiller, 2015). Not yet a week after that, “Black Monday” happened. What we might wonder here is whether the decline happened solely as a consequence of formerly existed market feedbacks, or the announcement of Batra did get on investors’ nerves? Let us first consider the study of David Cutler (1989) to see if his findings would be able to clear out any of our questions so far. Cutler (1989) firstly conducted a regression analysis on “the real, dividend-inclusive return on the value-weighted NYSE index” and the “macroeconomic news variables” including: real dividend payments, industrial production, real money supply, nominal long-term and short-term interest rates, inflation rate, and stock market volatility, all on a monthly basis for the period of 1926 – 1985. The adjusted R2 in the results of his restricted vector autoregression (VAR) test suggests that the macroeconomic news could only account for 18.5% to 18.8% of changes in stock prices, under different lags. In comparison with our common belief, this is surprisingly low. The same test was run using annual data of the 1871 – 1986 period but not many differences were found. Cutler then noticed some shortcomings in his models that might not capture the information fully and accurately, thus an unrestricted regression was carried out. The adjusted R2 turned out to be larger this time, explained approximately 40% of the changes in NYSE return, still the number is not good enough for macroeconomic news to be considered as a crucial element of the moves. What about non-economic news? Do other big events affect the prices? Unfortunately, the answer is still ‘unlikely’. Neiderhoffer’s research (1971) on the relationship between the S&P Composite Index and major world events of the 1950 – 1966 period shows only a little more chance of price increase compared to normal trading days (Shiller, 2015).However, the outcome of his study when taking into account some serious crises regarding politics and national defense incentivized Neiderhoffer to guess that “the crisis periods were somewhat more likely to be accompanied by big stock price changes” (Shiller, 2015). Even so, this conjecture might not have high reliability as it was based on the sample of only eleven events over such long periods of time. Cutler, later in 1989, set up an extended version of Neidehoffer’s investigation, brought together “forty-nine events along with the associated percentage changes in S&P Composite Index”. Its findings also indicate that non-economic news has little impact on market movements. In short, the empirical evidence has proved that the news only plays a minor role in the blooming process of stock markets. Be that as it may, believing large price moves to barely link with major news still seems a bit flimsy, especially given what we know about the way the media change people’s mind. Perhaps, investors have somehow received the information even before it’s brought out in the news. If this is the case, it will be understandable that we see the disconnection as the evidence presented because market participants might have already reacted as soon as they got the information. Even though there hasn’t been any study trying to test if people had the private information that drove the prices, we for now can think of it as a possibility since our real stock markets aren’t frictionless and information isn’t always completely incorporate in price. Moreover, the works above were focused on the influence of macroeconomic news and non-economic news but didn’t really consider that of the company’s announcements itself. Hence, we are now going to look into whether the news media has a hand in pushing up or dragging down some companies’ stocks, would the changes in these stocks be related to the movements of overall market, and would it be able for a company or certain people to spin the markets with the power of the news media. Up to now, we have been discussing about the news media as a precipitating factor of market bubbles mainly because most people rely on it for information, however, we have yet to question the real origin of this common source.
It’s plausible that the journalists watch the market movements and analyze stock performance on their own, still a public-information-based news probably won’t give them a high chance of attracting many investors’ attention. Therefore, seeking for a piece of information that their rivals can’t have access to is what journalists usually go for. And what could be a more unique resource than the company’s own insiders. In both of their papers in 2002 and 2003, Alexander Dyck and Luigi Zingales mention what they call “a quid pro quo relationship between companies and journalists” as an explanation for the biased information that market participants may receive. We firstly take a look at the case of Enron – a scandalous American energy company in 2001. According to Sherman’s report (2002), the very first person to check into Enron was Jonathan Weil from Wall Street Journal. Spending “two months of research and digging”, Weil finally reached the conclusion that something was off about Enron’s “mark-to-market accounting” and as he wrote their profits came from “unrealized, noncash gains” that based on “assumptions and estimates about future market factors, the details of which the companies do not provide, and which time may prove wrong” (Sherman, 2002). Though his paper didn’t get printed, its appearance on Dow Jones Newswires prompted James Chanos to “scrutinize the company’s financial statements” (Dyck and Zingales, 2002). After finding some “shady partnerships” existed at Enron, Chanos decided to short-sell his stocks and, secretly, gave this piece of news to a Fortune’s reporter, Bethany McLean, whose publication in March 2001 had started the wave of suspicion on Enron’s earnings. The article by Peter Eavis, who was also “tipped off by another short-seller”, in May helped to spread out the skepticism further (Sherman, 2002). Even so, many other business magazines were still writing positive news about the company. Only after the sudden resignation of Enron’s CEO Jeffrey Skilling in August and the company’s loss announcement in October did other news providers and the U.S. Securities and Exchange Commission kick off their investigation.
We might also need to mention that when these reporters were trying to reveal the negative side of Enron, they had suffered harassment from the company: McLean was hung up on by Skilling when trying to interview, Skilling called Fortune’s managing editor and implied leaving McLean’s paper out, or an analyst at UBS PaineWebber got ejected after releasing a notice on Enron’s financial corruption while a new optimistic paper about it was issued instead (Dyck and Zingales, 2002). Considering this example, Dyck and Zingales (2002) point out that journalists have incentives for choosing to write positively or negatively about a company and the side they are taking tends to change with respect to stock price trends. As we have discussed before, a reporter always wants to have the information none of his/her rivals has, thus a quid pro quo – something for something – would create a win-win situation for the reporter and the company, so that one gets exclusive story and one receives positive spin. In fact, this quid pro quo relationship was tested by Dyck and Zingales later in 2003, the results also indicated that a spin in company’s earnings announcement and a spin in media are mostly in line. In addition, going for negative news is not a good choice for both insiders and journalists, except for during market downfall. For insiders, “higher rate of news diffusion” will leave them with “lower private benefits” and as they will make money if the stock price goes up, there seem to be few reasons for them to tip off the negative information to outside journalists (Dyck and Zingales, 2002). For news reporters, writing a negative piece doesn’t just cost them more time and efforts that could even be in vain, but can also put them at the risk of being charged with libel or undergoing harassment, like reporters in Enron case. When the price starts to fall, things get reversed and short-sellers as well as insiders start leaking more internal information to journalists, who’re now no longer afraid of publishing negative news. If we look carefully into it, group behaviour is the cause behind the inflated effect of negative information. We can reasonably assume that in the downturn, as people are skeptical about the company’s stock value everywhere, journalists believe that they are facing little threat, more and more of them start to analyze the negative piece of news, and consequently that news get to be all over the place. The assumption regarding the effect of media coverage just above seems to have nothing related to the cause of a bubble because the price has already been on its way down when the news starts to spread. However, what would it be like if the same effect happens before we even know there is a boom?