MARKET REACTION TO BUSINESS-WEEK INSIDE-WALL-STREET COLUMN - A SELF-FULFILLING PROPHECY

This study focuses on stocks mentioned in a Business Week (BW) column in which over half the stories quote an analyst as a source. The resul ts of the study show that stocks with a favorable report in BW earn po sitive abnormal returns at the time of the distribution of the weekly. However, this is true only for stocks followed by less than twenty an alysts. Within this group, the market response increases as the number of analysts decreases. Stocks followed by more than twenty analysts d o not respond at the time of their mention in BW, We further document that trading volume increases at the time of the publication of the st ory, The six-month size-adjusted post-BW performance of the less close ly followed stocks with favorable stories is negative and offsets the abnormal return at the time of the BW story. We conclude that the evid ence is consistent with the self-fulfilling-prophecy hypothesis, i.e., traders react to BW stories and influence the prices of stocks, only to lose in the long run (six months). The results also show that infor mation obtained from non-analyst sources has a greater impact on stock prices than the information from analyst sources, indicating that som e of analysts' information is already reflected in prices through thei r clients' trading. The return reversion over six months is observed f or BW stories with both analyst as well as non-analyst sources.