The Incremental Value Relevance of Media Coverage of Earnings Announcements: Evidence from the Trading of Short Sellers

SYNOPSIS: We investigate the relation between media coverage and the trading behavior of short sellers around earnings announcements. Prior research provides conflicting evidence on the role of the media, with some studies finding that the media can impede the price discovery process. Our evidence indicates that short sellers increase their activity in line with the tone of media coverage around earnings announcements, after controlling for earnings news and other factors that affect relative levels of short selling. Furthermore, we show that information in the media successfully forecasts earnings information in the days leading up to the earnings announcement, and that short sellers trade in a manner consistent with information reflected in media coverage preceding the earnings announcement. Our findings are consistent with information contained in the media having value relevance, and suggest that the media may help to facilitate the price discovery process around the release of earnings.