How does news about companies influence their stock prices?

A company's stock prices tend to observe short-term movement with impactful news, hype, and events occurring in the company. Any reported information related to the release of new products or services by a company, the speculated increase in the value of their shares and profits, and positive news and financial reports are one such driven factor behind stock price influence.
Estimated Reading Time: 8 minutes

Introduction

While investing, investors and traders must remember that there is a company behind every stock. There is always a particular reason behind the performance of the company and its stocks. As a range of factors drives stock prices in the market, they instantly tick up and down depending on supply and demand fluctuations. However, it is pertinent to note that this relationship between supply and demand is highly sensitive to its news.

Stock market reacts to breaking news. So, yes, one such significant factor behind fluctuating stock prices is the news about the companies. The news may be positive or negative, hence affecting the particular company’s reputation in both ways.

While it is tough to quantify the stock price influence due to the related news about any company’s inside development, it affects investors’ sentiment. For example, Microsoft is reported to incur a hefty year-over-year rise in its quarterly earnings; this is good news and will increase the stock price. Except that Apple may have been expecting an even sturdier rise, Microsoft’s stock price may fall.

The news about companies and their performance often gets reported in Government economic reports, quarterly financial statements of the companies, and other global events and deals. These reports suggest the individual company’s stand in the economy, its performance in recent months, and even how it will perform shortly.

How Good News/Bad News influences Stock Prices

Investors process the breaking news information about a company, analyze its effect on stock prices and reacts accordingly. The type of reaction from investors depends on whether it is good news or bad news, so it is imperative to understand the news sentiment. The sentiment of news can be segregated into three forms: Positive, Negative, and Neutral. Good and bad news positively and negatively impacts the investor’s sentiments, respectively, but the reaction’s magnitude also depends on the market’s bull and bear trend.[1] In India, many research studies on the market impact of Company-specific news on the stock prices and investor’s decisions are carried out with sentiment analysis.

To gauge the stock price influence in terms of the reported news about an individual company, let’s understand it better in terms of good news and bad news.

A piece of bad news will harm the company performance and will generally cause traders to sell stocks. The negative news about a company may be reported in the form of a bad earnings report, economic uncertainty, in the long run, failure in corporate governance, and other unfortunate events all translate to the pressure of selling the stocks, resulting in a decrease in stock prices. If a company announces the layoff of workers or close one of their divisions, this news may be a factor for dropping the company’s stock price. Negative news about a company in most probable cases cause the stock prices of its competitors to go up.

On the other hand, good news or positive news will influence people to buy stocks. The positive news instances may be reported mainly in the corporate acquisition, useful earnings reports, favorable economic indicators, or announcement of a new launch. All these reporting translate into buying pressure and lead to an increase in stock prices. So, it becomes crucial for the investors to decipher the type of news and determine its material impact on their stocks.

Anticipation of News

Professional traders are constantly seeking an opportunity to buy or sell the stocks before releasing the actual numbers. As discussed above, in most cases, professional traders spend much time trying to study the stock market and anticipating the next news cycle so that they buy or sell early. In anticipation of the news indicating the performance of several companies the traders have been eyeing on, they analyze several information sources. Some of these sources are listed below[2]:

  1. Government economic reports: The primary source of information for traders to study companies’ background is through the Government financial reports. They are direct indicators of the company’s strength and their position in the economy and suggest the lagging and leading indicators for the traders before buying or selling stocks.
  2. Company and Industry News: Besides noting the company’s performance from the quarterly reports, traders confidently rely on the company and industry news like what products are trending right now, how orders have been shaping currently, and other trends in demand.
  3. Gossip: Often, business news reports note the company’s sales or revenues, whether they succeeded or failed to meet a ‘whisper number’. These reports are not based on the hard facts but the gossip floating in the stock market about a company. Some of the rumors are based on factual and reliable information, and some have no foundation in truth.

These sources can build high expectations towards the performance of companies from an investor’s perspective, who believe the prices of the stocks of these companies are going to rise. Therefore, the investors are recommended to take wise decisions based on their analysis of the merits of news about companies rather than speculations.

How long does it take for news to affect the stock prices?

A piece of news that may be bad or good is seen to impact stock prices fluctuations. But how long does it take for a piece of bad or good news to affect a company’s stock prices? Well, to answer, you can always expect an instantaneous effect of unexpected news about a company on its stock prices. There is still a forecasted figure that doesn’t impact as such in the case of expected news. But the effect of unexpected news can be seen in hours or days to come, particularly until the following information is released.

That again depends on the source of the report. If the news is political, it often has longer and slower effects on the economy, while its specific news impacts its stock price influence within seconds that lasts for days or weeks. However, as soon as the following news item concerning the company, it nullifies the previous one’s effect.

Impact of Company-specific news Coverage in affecting stock prices

The market impact of listed companies’ news coverage on the stock price can be broadly classified into two parts:

  • Firstly, the sentiments of the Company-specific news affect the stock market sentiments, &
  • Secondly, these sentiments, in turn, affect the demand-supply chain of the stock market.[3]

The demand-supply chain plays a crucial role in the market. As seen, the news coverage on relevant information generates investor’s sentiments, which recognize its relevance and react accordingly, that result in stock prices fluctuations. Where negative sentiments attract more sellers, positive sentiments attract more buyers to buy the shares. But not all news is relevant. As per data, out of 100 news records, only 20 comes out as a relevant one. The other 80 adds noise.[4]Some examples of Company-specific news are news regarding a change in ownership, announcements related to earning, bonus and right and split share, etc. Let’s understand the impact through some literature reviews:

Faizal (2007)[5] investigated the effect of company-specific news on stock prices by selecting six companies from various sectors. The news on companies was gathered from the audit reports, company’s websites, and exchange website from June 2000 to June 2005. The collected news story was classified as a change in the board of directors, change in management and investment decisions, change in policies, and dividend announcements. The study then applied these classifications to check the impact of related news.

As per the data analysis, the news information related to profit, dividend, new administration appointment, recent investment decisions, insider trading, etc., has a positive impact on companies’ stock indices. The other news about leverage decisions, further issue of stocks suggested that the analyst and investors perceive these as negative news or news that has a fewer impact on further investment decisions and somewhat risky in terms of earning per share and dividend income loss.

Further, Sprenger and Welpe (2011)[6] studied the impact of different Company-specific news events on S&P 500 stock prices and the market. The different news types were classified as negative and positive based on the tone used in the news. The authors used the Naïve Bayesian classification method to organize news information into Legal Issues, Financial Issues, Restructuring issues, Corporate Governance, Operations, and Technical Trading. The significant findings followed from the event study were as follows:

  • The positive news tends to generate higher CAR in comparison to a negative one.
  • Among the other classifications of news, financial issues and Restructuring issues were found to have a more significant stock price influence, having high AAR.
  • Online stock forums were found to be a significantly reliable source to identify real-world news events that are on investor’s minds.
  • It was concluded that returns are positive for two to three days in a row before the news release and negative on the days after the event. Further, the trading volume increases one day before the news release and remains higher in the days after the news arrival.

Conclusion

News about companies influences their stock price in several ways. It is critical to understand that chasing the news for a good reputation is not a wise stock-picking strategy to gain investor’s trust. However, the company-specific information does nothing directly to the stock price. Still, it bases investors’ opinion and influences them to decide whether to buy or sell a company’s shares.

As seen, the professional traders react in anticipation of an event before the event even gets reported. So, it is not always possible to capitalize on news and balance your company’s reputation because of stock price influence when the matter could not be possibly foreseen. Since the market is always building future expectations into stock prices, the impact of new information on its stock depends on how unexpectedly the news comes out. It is the unexpected news that helps drive the stock prices of companies.


[1] Divyang Joshi, A Study on Impact of Company-specific News on Investor’s Decision in India, last assesses Jan 6th 2021, at http://hdl.handle.net/10603/207727.

[2] Brian Beers, How the news affects stock prices, last assessed Jan 6th 2021, at https://www.investopedia.com/ask/answers/155.asp.

[3] Munz Marion (2001). Measuring the value of media sentiment: A pragmatic view. PP 109-128 The Handbook of News Analytics in Finance Edited by L. Mitra and G. Mitra , 2011 John Wiley & Sons.

[4] Hafez P.A (2009a) Construction of Market Sentiment Indices Using News Sentiment, RavenPack International S.L.

[5] Zaman, Faisal, Effect of Company Related News and Events on its Stock Prices Research Conducted on Top Six Companies Listed at Karachi Stock Exchange (2007). Available at SSRN: https://ssrn.com/abstract=1019179 or http://dx.doi.org/10.2139/ssrn.1019179

[6] Sprenger, T. and Welpe, I. (2010). “Tweets and trades: The information content of stock microblogs”. Social Science Research Network Working Paper Series, pages 1–89.

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