Swedroe: The Media Effect

March 02, 2015

For individual investors, the financial media plays an important role in disseminating information on securities markets. For example, a 2000 survey by the SEC found that more than 40 percent of individual investors rely heavily on information derived from mass media when choosing their mutual fund investments.


David Solomon, Eugene Soltes and Denis Sosyura—authors of the study “Winners in the Spotlight: Media Coverage of Fund Holdings as a Driver of Flows,” which was published in the July 2014 issue of the Journal of Financial Economics—sought to determine if individuals use information from the media to make better investment decisions.


The authors studied the role of media coverage in investors’ capital allocations to mutual funds and found that it does have a significant effect on how they allocate capital. The following is a summary of their findings:


  • Investors’ capital flows respond to holdings’ past returns, but only if these holdings were covered in widely circulated newspapers in the preceding quarter.
  • Investors allocate significantly more (less) capital to funds holding media-covered stocks with high (low) past returns.
  • The effect on flows is driven more by rewarding funds that hold media-covered winners than penalizing funds that hold media-covered losers.
  • Fund flows react strongly to holdings’ returns in the periods after disclosure, but not before. In other words, the effect of media-covered holdings on fund flows is driven by the disclosure of those holdings.
  • Investors’ reaction to media-covered holdings is driven by media coverage of stocks rather than media coverage of mutual funds.
  • When comparing returns to risk-adjusted benchmarks, there’s no evidence that shows investors tend to receive higher returns by investing in funds with media-covered past winners. However, they likely incur substantial transaction costs from fund chasing.


The authors concluded that media coverage influences investor behavior in a way that exacerbates behavioral biases, such as chasing recent performance. So it seems that mutual funds have been correct to engage in the well-documented behavior of “window dressing.” Window dressing is when funds buy recent winners just before reporting dates because they believe investors will assume the fund was skillful in identifying the past winners ex-ante.



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