Social fragmentation has reached new levels in the United States over the past ten years. But is it feasible for criticism to produce a change of perspective? According to new studies from Michigan State University, yes—particularly for the stock market.
The study, which was published in the Journal of Financial Economics, is the first to demonstrate that social fragmentation exists in economic news, which creates new levels of investor dissention. And as a result of this dispute, daily stock trading size rises by 30%.
“We are aware that people consume announcement that connotes their political beliefs. But this fragmentation isn’t expected in financial reports, where the main goal is to inform economic decisions,” said Ryan Israelsen, study author and A. J. Pasant Fellow and Associate Professor of Finance at MSU’s Broad College of Business.
“More importantly,” he continued, “because most investors limit their reading to a handful of news outlets, this polarization in coverage leads to disagreement among investors, which ultimately leads to more trade. We find this to be particularly true in the most Democrat- and Democratic-affiliated companies, where debate leads to 30% more trading level.”
Israelsen and his co-authors from Indiana University analyzed 30 years of the Wall Street Journal’s and the New York Times’ media policy of the 100 largest U.S. firms. They discovered that these national media corporations reported separately when doing the same firm-level reporting: the WSJ did more favorable reporting on Republican-affiliated businesses, whereas the NYT did not report on Democratic-affiliated businesses.
According to Israelsen, the findings may give investors a framework for how to interpret financial information given that 2024 is an election time.
“Before carrying out our investigation, it wasn’t visible that varied coverage may lead to more investing. For example, if most buyers read both the New York Times and the Wall Street Journal, we hadn’t expect a lot of debate since everyone is getting the exact details. That’s hardly consistent with what we found,” he said. “As an entrepreneur, understanding that there is a potential social slant to financial information is critical. Buyers might want to expand the range of multimedia outlets, specifically for information about shares in their portfolios.
“Partisanship has been increasing among politicians, members and even public statements by companies,” Israelsen continued. “With an vote approaching, buyers needed to keep this in mind when reading the news.”
Israelsen and his co-authors also examined how political involvement affected the likelihood of coverage, its voice, and its emphasis on positive or negative information in the research. In more articles, particularly those about good financial news, good words were woven into a more favorable tone. Additionally, newspapers were more likely to post articles about affiliated companies that followed good information while omitting reports about affiliated companies’ bad news. Irrespective of a company’s size or whether it paid for advertisements in the news outlet, the results were accurate.
“Media must make their own decisions in light of everything that is going on in the financial markets. they can’t handle everything,” Israelsen noted. “They may choose to handle particular news differently or to not include certain news altogether. Although our study does demonstrate that coverage differs between the two outlets along a social front, we cannot claim to be biased in any way.”