Hadzic, Muris and Weinbaum, David and Yehuda, Nir, News Content, Investor Misreaction, and Stock Return Predictability (September 2015). Available for download at SSRN: http://ssrn.com/abstract=2653920

“Using a large dataset of news releases, we study instances of investors’ mistaken reaction, or misreaction, to news. We define misreaction as stock prices moving in the direction opposite to the news when it is released. We find that news tone predicts returns in the cross-section only upon the occurrence of misreaction. Stocks that are larger, more liquid, more visible, and more covered, by analysts or by the media, are less likely to exhibit misreaction. On the other hand, the ambiguity and complexity of news content, and variables that proxy for investor distraction, are all associated with more misreaction and greater predictability.”