“What you see is all there is”: The effects of media co‐coverage on investors’ peer selection

2018-03-09Benchmarking with industry peers is ubiquitous in financial markets, yet relatively little is known about investors’ peer selection process. This paper examines media co‐coverage as a factor in peer selection. An industry peer’s frequent co‐appearance with a firm in media news articles can increase the peer’s salience and highlight its association with the firm. In the presence of information gathering and processing frictions, increased salience may cause investors to pay more attention to, and even overweight signals from high media co‐coverage peers. The empirical evidence is consistent with this conjecture. First, investors attend more to information from high co‐coverage peers—a non‐announcing firm’s stock price reacts more positively to the earnings surprise of the early‐announcing industry peer with higher media co‐coverage. Second, investors overweight signals from high co‐coverage peers—earnings surprise of the highest co‐coverage peer negatively predicts the firm’s announcement return in the same quarter, which is consistent with a correction of the initial overreaction to the highest co‐coverage peer’s earnings news. In addition, I find that media co‐coverage distorts investors’ benchmarks—investors overreact to a firm’s earnings announcement if its sales growth exceeds the early‐announcing peer with the highest media co‐coverage. By documenting the economic consequences of investors’ (suboptimal) peer selection, this paper contributes to prior literature that has mainly focused on developing technologies that identify the most appropriate peers