This paper examines whether investors correctly distinguish qualitative information from promotional language in press releases related to material events of US public firms. For a variety of material events, firms are required to issue a Form 8-K, but 37% of the time also voluntarily issue a press release concerning the same event, half of which occur prior to the 8-K filing date. Using textual analysis, I find that firms are more likely to issue a press release if the underlying 8-K tone is positive, and that tonal differences between the 8-K and the press release are driven in part by quotes from officers. I also find economically significant responses in firms' stock returns to tonal language in the 8-K, as well as to tonal differences between the two disclosures. To verify whether my strategy of comparing the press release against the 8-K is isolating the effects of promotional language or additional information, I test and find evidence of an initial positive reaction but subsequent negative drift from positively toned press releases. This implies that investors may have initially responded to both information and spin. Nominating investor inattention as a possible mechanism for overreaction, I use novel search traffic micro-data from the SEC EDGAR website and detect lower 8-K search intensity in the presence of a press release. Together, my results are consistent with some investors overestimating the degree of substitutability between the two disclosures and thus failing to readjust expectations accordingly.
Applying a "co-search" algorithm to Internet traffic at the SEC's EDGAR website, we develop a novel method for identifying economically-related peer firms. Our results show that firms appearing in chronologically adjacent searches by the same individual (Search Based Peers or SBPs) are fundamentally similar on multiple dimensions. In direct tests, SBPs dominate GICS6 industry peers in explaining cross-sectional variations in base firms' out-of-sample: (a) stock returns, (b) valuation multiples, (c) growth rates, (d) R&D expenditures, (e) leverage, and (f) profitability ratios. We show that SBPs are not constrained by standard industry classification, and is more dynamic, pliable, and concentrated. Our results highlight the potential of the collective wisdom of investors - extracted from co-search patterns - in addressing long-standing benchmarking problems in finance.
We identify the presence of high frequency arbitrageurs in the US treasury market through intraday exchange outages. Evidence complementing our identification shows that order cancelation behavior also changed during the outage, consistent with arbitrageurs' profit maximization motives. Our estimates suggest that arbitrageurs represent approximately 69 to 94% of the quote depth in the spot treasury market. In addition, their presence seems to have large effects for the bid-ask spread of the 30-year treasury bond, which is the most illiquid product within its class.[Motivating Graph]