The Media Reinforcement Effect in the Chinese Stock Market

Abstract

This article focuses on the interaction between media and asset prices and explores the potential mechanisms that drive stock market reaction to news media. The authors find that when buying past losers with low sentiment and selling past winners with high sentiment, the return obtained exceeds the standard reversal effect, and media sentiment has the effect of enhancing stock returns; that is, there is a media reinforcement effect. When the returns are opposite to the media sentiment, the return obtained is lower than the standard reversal effect; that is, the media reinforcement effect disappears. Using different types of media, the authors find that the state-controlled media has a media reinforcement effect, while the private media does not have this same effect. At the same time, the authors find that the stronger the heterogeneous beliefs of investors and the more severe the arbitrage restrictions, the more significant the media reinforcement effect. This article helps to clarify the internal mechanism underlying the market’s reaction to the news media.