The Effects of Media Co-coverage on Investors' Perceived Relatedness between Two Firms: Evidence from Information Transfers

Abstract

This study examines the effects of media co-coverage——a phenomenon where multiple firms are simultaneously mentioned in the same news article—on investors' perceived relatedness between the co-covered firms. Using the setting of information transfers between two co-covered firms during earnings announcements, I find evidence consistent with co-coverage increasing the firms' perceived relatedness. Specifically, the announcement return of the co-covered peer negatively predicts the announcement return of the focal firm following the peer's earnings announcement, suggesting that focal firm investors overreact to the peer's earnings news in information transfers. The negative relationship is stronger when investors are more likely to pay attention to the news article where they were co-covered, and when the peer's earnings are more relevant to the focal firm's upcoming earnings announcement. Further analysis shows that the co-coverage-induced overreaction is stronger when the focal firm has higher uncertainty and when retail investor attention to the focal firm is higher on the peer's announcement day. These findings shed light on an unintended consequence of journalists' co-coverage practice on the efficiency with which equity investors use peer information.