What the Market Watched: Bloomberg News Stories and Bank Returns as the Financial Crisis Unfolded

This paper explores a unique dataset gathered via Bloomberg during the early stages of the recent financial crisis. Unlike previous literature that has often used information on headlines as a metric for news, the dataset here contains information on readership and therefore provides a glimpse into the extent to which financial market participants were focused on the news of a particular firm as the financial crisis unfolded. By examining the news that captured the attention of these participants and exploring its relationship to bank returns, this paper addresses the role that market news and reputation may have had in shaping perception during the crisis. There is strong evidence that firms whose news elicited higher readership suffered significantly lower returns than those that did not, both contemporaneously and subsequently. Those banks that on average had relatively high readership interest, or that ranked highly in readership interest a large proportion of the days in the sample, on average had returns that were about 20 percentage points lower than banks that remained relatively out of the spotlight. In addition, greater news readership is associated with higher volatility of returns. A model portfolio that each day is short the ten banks’ stocks that were in the top readership rankings the previous day and long the other stocks generates a cumulative P&L of 1.45% in the run-up to the crisis; during the same time period the S&P 500 Financials Index declined more than 39%. The results suggest that news stories that result in high readership among financial market participants can have a large effect in shaping the latter’s perceptions and subsequent decisions. In addition to understanding the impact of firm “news” on equity prices as the crisis unfolded, there also may be significant implications for the release of information, and subsequent “news” reports, regarding borrowing of financial institutions from the Federal Reserve – issues raised in legal cases now before the courts (e.g., Bloomberg, L.P. v Board of Governors of the Federal Reserve System 2009, Fox News Network LLC v Board of Governors of the Federal Reserve System 2009). * Kogod School of Business, American University and National Bureau of Economic Research. Kathryn Kerner provided exceptionally diligent research assistance during the data collection effort. This research was initiated independently of, and prior to, the filing of the Bloomberg v. Board of Governors of the Federal Reserve System (2009) case. Any references or suggested implications of this research to that case are the author’s alone and occurred subsequent to the publication of Judge Preska’s opinion and order (Bloomberg L.P. v. Board of Governors of the Federal Reserve System, 2009). The views and opinions expressed herein are those of the author and do not necessarily reflect those of anyone affiliated with the Federal Reserve System, where the author was formerly employed. JEL classifications: G01, G14, G21