Financial Transparency, Media Coverage, and Momentum in China

ABSTRACT

This paper digests the influences of financial transparency and media coverage in the Chinese stock market. In China, media performs under a regulatory system and media information is regarded as the direction of news. In addition, the Chinese market is dominated by retail investors and financial information is always manipulated, so the reliability of financial information is quite intriguing. The effect of ostensible financial information on the stock market through the media hype is a crucial issue. We employ media and transparency to analyze over 3,000 stocks in China. First of all, the Chinese stock market is characterized by significantly negative momentum profit and thus exhibits price reversal. However, when high media coverage and high transparency jointly come into play, the significantly negative momentum profit turns to be significantly positive. This dramatic change alters the price reversal to be price momentum. By contrast, low media coverage and low transparency still result in price reversal.

KEYWORDS:

• Transparency
• media coverage
• momentum

JEL:

• G0
• G10
• G11
• G14

Notes

1. We use certain factors and formation returns in order to group stocks and take the intersection between the grouping results to construct an interactive momentum portfolio (e.g., Goyal and Wahal 2015; Scott, Stumpp, and Xu 2003; Verardo 2009). As for the break-down momentum portfolio, we first group the stocks according to their formation returns, and then further group them based on the chosen factors (e.g., Demir, Muthuswamy, and Walter 2004; Fuertes, Miffre, and Rallis 2010; Grinblatt and Han 2005). Moreover, in order to construct the conditional momentum portfolio, we first sort the stocks according to the chosen factors and then further group them based on their formation returns (e.g., Avramov et al. 2007; Menkhoff et al. 2012; Novy-Marx 2012).

2. If we do not fully use the three types of momentum portfolios, we will reach unreliable conclusions. Cheema and Nartea (2014) and Naughton, Truong, and Veeraraghavan (2008) both studied the relationship between momentum and turnover. Since they used different momentum portfolios, they obtained contrasting results and reached opposite conclusions. This suggests that the conclusions of these two studies are unreliable.