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Lura Forcum
Kelley School of Business

George Vlahakis
University Communications

Last modified: Monday, March 30, 2009

Research study: Media has scant role in creating and bursting stock market bubbles

Media hype results in only short-term impact on stock market returns

March 30, 2009

Editors: The paper discussed in this release is available for download at

BLOOMINGTON, Ind. -- The news media has little influence in propelling financial market bubbles or causing their meltdowns, and has only short-term effects on returns. This main finding of an analysis of media coverage and stock performance during the dot-com bubble refutes the current controversies on the issue, say researchers at Indiana University's Kelley School of Business.

Bhattacharya image

Utpal Bhattacharya

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Between 1996 and early 2000, which was the peak of the bubble, "net news" -- or good news minus bad news -- was more positive for Internet Initial Public Offerings (IPOs) than for other types of IPOs by nearly two to one, while net news was far more negative for dot-com IPOs by almost four to one after the bubble burst in March 2000.

"During the Dot-Com Era, the media tended to be over-optimistic when prices were rising but over-pessimistic when prices were falling, a situation similar to the media hype over the past several years," said Utpal Bhattacharya, associate professor of finance in the Kelley School and co-author of a study forthcoming in the Journal of Financial and Quantitative Analysis.

Further, Bhattacharya pinpointed that media coverage tended to affect a company's financial performance -- including stock prices and daily returns -- for only a one- or two-day period and, even then, the impact was minimal for both positive and negative news.

In fact, the study found that the overall effect of media hype on financial returns could explain less than 3 percent of the more than 1,646 percent difference in returns between Internet stocks and non-Internet stocks from Jan. 1, 1997, through March 24, 2000, the day the NASDAQ peaked.

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Daily News Per Firm: Prior and Post NASDAQ's Peak

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Bhattacharya said the recent public battle between Comedy Central's Jon Stewart and CNBC's Jim Cramer over the media's role in today's economic climate has made the results of the study even more relevant.

"Regardless of whether the media's coverage of the current crisis was good or bad, accurate or complicit, recent history seems to indicate that -- at least in terms of market returns -- it doesn't really matter either way," he said.

For the study, researchers compiled a database of all news items on 458 Internet IPOs and a matching sample of 458 non-Internet IPOs between 1996 and 2000. The researchers classified each of these 171,488 news items as good, neutral or bad news and calculated the impact of the news items on the firm's stock market returns over the same time period.

Bhattacharya authored the paper, "The Role of the Media in the Internet IPO Bubble," with Kelley School Professor Xiaoyun Yu and doctoral students Neal Galpin (now a professor at Texas A&M University) and Rina Ray (now a professor at the Norwegian School of Economics).