Information effects and stock returns

Does an increase in newsflow on a stock anticipate increased returns?

In today’s computerised world it is easy to monitor the amount of newsflow on particular stocks. It is also possible, using tools like Google Trends, to monitor active interest in stocks. For example, the following chart shows the number of Google searches on “AAPL” (the ticker for Apple) since 2005.

Google Trends - searches on the ticker AAPL

But can this information be used to predict share price behaviour?

Research by Yanbo Wang of INSEAD suggests it can.

In his paper (Media and Google: The Impact of Information Supply and Demand on Stock Returns) Wang found that the key factor to monitor was an increase in both

  1. supply: the newsflow (as measured by news articles in Factiva),
  2. demand: Google search volume

on specific companies. His research found that an increase in the pair of supply and demand of newsflow resulted in subsequent abnormal returns for stocks.

His explanation is-

The results are consistent with the hypothesis that an increase in information supply drives stock prices up only when an increase in information demand confirms that information supply succeeds in raising new investors’ awareness and existing investors’ additional learning effort.

The following chart plots the monthly excess returns of an equally-weighted, monthly re-balanced portfolio that is-

  • long stocks that have experienced an increase in information supply and demand the previous month, and
  • short all other stocks.

Media and Google: The Impact of Information Supply and Demand on Stock Returns, Yanbo Wang

The above portfolio generated abnormal annual returns of 16%-22%. This increased to 23%-34% when the portfolio was restricted to smaller stocks.


Wang, Yanbo, Media and Google: The Impact of Information Supply and Demand on Stock Returns (November 20, 2012)

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