Pacic-Basin Finance Journal 24 (2013) 2238

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Pacic-Basin Finance Journal

journal homepage: www.elsevier.com/locate/pacfin

An analysis of the impact of media coverage on stock price crashes and jumps: Evidence from Japan
Hiroyuki Aman
School of Business Administration, Kwansei Gakuin University, Uegahara 1-1-155, Nishinomiya City, Hyogo 662-8501, Japan

a r t i c l e

i n f o

a b s t r a c t
We attempt to identify a possible linkage between stock price crashes and jumps and media coverage by using data from Japanese stock markets and newspaper articles. Our evidence clearly indicates that crash frequency increases with media coverage and its seasonal concentration. This key nding supports the notion that intensive media reports on a rm provoke extremely large reactions in the market to corporate news. However, we nd no evidence that media coverage has a positive impact on jump frequency. Further, by using an alternative measure of the scale of crash returns, we conrm the increasing effect of media coverage on crashes. We also nd that the media effect is caused by market reactions, particularly to news on ofcial disclosure information such as announcements of accounting results. 2013 Elsevier B.V. All rights reserved.

Article history: Received 19 January 2012 Accepted 6 February 2013 Available online 18 February 2013 JEL classication: G14 D03 Keywords: Stock price crash Media coverage Corporate disclosure

1. Introduction In this study, we attempt to empirically examine the linkage between mass media activity and extreme movements in stock prices, that is, crashes and jumps. In nancial markets, it is occasionally observed that a stock price falls over a short interval and on an extremely large scale. For example, evidence from the US rms in Hutton et al. (2009) shows that about 17% of sample rms experience one or more crashes, where the average return of a crash is 22.7% on a weekly basis. 1 In our case, the percentage of Japanese rms experiencing crashes amounts to 26% of the total sample, where the average return of a crash is 8.5% on a daily basis. However, little attention has been paid to the issue of how the information ow in the market inuences the extremely large changes in individual stock prices. In terms of disclosure information, some prior studies argue that crashes manifest the lack of timeliness to incorporate information in markets because

Tel.: +81 798 54 6343. E-mail address: aman@kwansei.ac.jp. 1 The denition is that the return falls into the 0.1% lower tail of the normal distribution. 0927-538X/$ see front matter 2013 Elsevier B.V. All rights reserved. http://dx.doi.org/10.1016/j.pacn.2013.02.003

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crash frequency is indicative of managerial incentives to hide information by dilatory disclosure practices. The seminal study by Jin and Myers (2006) theoretically demonstrates that opaque disclosure leads to a sudden and large outow of bad information that was cumulatively hidden and, thus, results in a stock price crash. In fact, they nd strong evidence that poor accounting transparency is positively related to crashes using a cross-country analysis. Hutton et al. (2009) provide similar empirical evidence from a cross-sectional analysis of US rms. In the Japanese setting, several studies have consistently found an interesting pattern of return reversals over a short time horizon such as one month, which contrasts with the US ndings of long-run reversals (Chang et al., 1995; Bremer et al., 1997; Iihara et al., 2004; Chou et al., 2007). Despite the fact that evidence is available, the issue of what information ows may induce the overreactions in the markets has not been fully addressed. Therefore, our investigation into large price changes in the short run should contribute to a more in-depth understanding of the question of how the unique anomaly of short-run reversal is formed in terms of information ows in the market. On the other hand, the question of how the diffusion process for corporate information disclosed by a rm affects crashes and jumps remains unanswered. Our aim is to explore this issue by focusing on the intermediation by mass media. The common perception is that the mass media plays a major role in intermediating corporate information to the public. Therefore, not only the corporate disclosure as the originating source of information, but also the diffusion process through media activity may have a signicant inuence on crashes, given that the investors recognition of information depends on how actively the mass media reports corporate news. As clearly summarized by Miller (2006), the mass media can mitigate possible information asymmetry between rms and investors via the redistribution of information disclosed by rms and also via original investigations. Interesting evidence on the information effect specic to media reporting is presented by Huberman and Regev (2001), who nd that a newspaper article regarding a cancer-cure drug induced a large response in the stock price despite the fact that the scientic innovation had already been published in an academic journal prior to the media citation. In the nance literature, relatively little attention has been given to how media reports contribute to price movements. An increasing, but still limited, number of studies have examined the relationship between media reports and stock pricing, but they do not explicitly consider extreme changes of price, focusing mainly on normal returns. Examples include examinations of media effects on excess returns (Chan, 2003; Fang and Peress, 2009), on return predictability (Tetlock, 2007; Tetlock et al., 2008), and on the liquidity of stock (Bushee et al., 2010). Our study further explores how the frequency and distribution of media coverage affects crashes and jumps in order to determine its role in the timely provision of information to markets. Specically, we test two conicting hypotheses. The crash (jump)-reducing hypothesis suggests that the mass media provides information that investors would otherwise miss and thereby contributes to raising the basic level of information, which is priced over a wide range of trading days. If this hypothesis is true, active media reporting should smooth the pricing process and reduce crash frequency. Alternatively, the crash (jump)-inducing hypothesis implies that greater media coverage induces more frequent and extremely large reactions among investors. If this hypothesis is correct, active media reporting should be harmful to smooth price formation. To test which hypothesis is valid, we use the stock market and press media data from Japan. The contribution of our study is that, rst, in exploring stock price crashes at the rm level, we focus on the media effect. The above-mentioned prior works (Jin and Myers, 2006; Hutton et al., 2009) attribute the effect of crashes mainly to information asymmetries stemming from accounting disclosure practice on the corporate side. We extend this literature by seeking the potential effect of the media. As previously noted, empirical evidence on the effect of the media on nancial markets is limited, despite the media's substantial role in the modern economy as a provider of information to the public. In related research, Bhattacharya et al. (2009) examine the media effect on large-scale rises and falls in stock prices around the Internet IPO bubble period. However, they fail to detect the substantial economic effect of media. More specically, to determine the media effect, we use not only the total amount of media coverage simply counted, but also take into account the seasonal concentration of monthly media coverage to capture how intensive news reporting affects market reactions to gain a better understanding of the crash-inducing effect. In addition, to measure crashes and jumps, we use the frequency of rm-specic excess returns on a daily basis and the scale of returns of crashes (jumps), which is not used in prior studies.

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Our examinations of the crash-inducing effect can be valuable for broad literature on nance because recently asset pricing research has growingly paid attention to extremely downside risk (EDR) and provided evidence that the risk signicantly accounts for expected returns (Barro, 2006; Bollerslev and Todorov, 2011; Huang et al., 2012). Our crash measures are relatively simple but share the concept with EDR studies in spirit. Therefore, given prior evidence on EDR, our analysis partly leads to better understanding of EDR-return relationships in terms of mass media's role. 2 Second, as daily press coverage in Japan is particularly extensive, our data should generate clear insights into the media's inuence. To illustrate the remarkable media presence in Japan, the World Press Trend 2010 reports that, based on worldwide statistics, Japan is ranked rst in terms of the total circulation of daily newspapers and sixth based on the circulation per population. In terms of individual newspaper rankings, of the top 10 newspapers by circulation, ve are from Japan and the largest daily paper that specializes in economic issues, the Nikkei, which is used in this study, is ranked 7th. 3 It has a daily circulation of 3,056,036. Its US and UK counterparts, The Wall Street Journal and the Financial Times, have daily circulations of 2,012,000 and 451,676, respectively. 4 Hence, the combination of the Japanese press media with the nancial market should be a good way to crystallize the effect of the media, whereas the prior studies on the media effects on stock markets are almost exclusively based on US rms. Third, as an interesting result, our primary evidence clearly supports the crash-inducing hypothesis that the active media reports prompt crashes, in terms of both crash frequency and the scale of return. This nding is new, and contrasts with the prior evidence that active information disclosure by rms diminishes the probability of crashes, despite the fact that the common aim of the media reports and corporate disclosure is to provide as much information to the market as possible (Jin and Myers, 2006; Hutton et al., 2009). In addition, crashes occur more frequently when media reports are more concentrated in a particular period (less equally distributed over time), which suggests that not only the amount of media coverage, but also the intensity of mass media reports, is important in inducing crashes. Finally, our study provides us with interesting comparisons between crashes and jumps. Jin and Myers (2006) focus on crashes because of their main emphasis on managerial incentives to hide unfavorable information. Hutton et al. (2009) nd that transparency has a signicant relation only with crashes, but nd no clear evidence on jumps. The press media should have different incentives to disseminate the various types of information to readers. In the absence of the media's incentives to conceal bad news, their provision of information may inuence both crashes and jumps in a similar fashion. However, given the media's social role to uncover corporate scandals, as argued by Miller (2006), the media coverage may be more inuential for crashes than for jumps. In fact, we nd no evidence that the frequency of jumps is signicantly related to media coverage, in contrast with the crash-inducing effect, but the share of jump returns is strongly inuenced by the media coverage. This paper is organized as follows. In Section 2, we explain the research background and describe the empirical hypotheses. In Section 3, we describe the measures of crash frequency and media coverage obtained from our Japanese data source, and then present our main results. Section 4 concludes the paper. 2. Empirical hypotheses 2.1. Information ows and crashes (jumps) This study is motivated by the initial nding of Jin and Myers (2006) relating corporate disclosure to crashes. They construct a model of managerial incentives to hold back, rather than disclose, negative information, which only becomes public knowledge when the pressure to release it becomes unbearable.

2 We should note a difference in that crash events that priors suppose are something like a great disaster, and yet our events are extreme drops of returns at relatively modest level. 3 The list is as follows, ordered by ranking, title, country, and circulation (1000). (1) Yomiuri Shimbun, Japan, 10019, (2) Asahi Shimbun, Japan, 8019, (3) Mainichi Shimbun, Japan, 3738, (4) The Times of India, India, 3556, (5) Bild Germany, Germany, 3300, (6) Cankao Xiaoxi China, China, 3254, (7) The Nikkei, Japan, 3050, (8) The Sun, UK, 2863, (9) Chunichi Shimbun, Japan, 2728, and (10) People's Daily China, China, 2523. Yomiuri, Asahi, Mainichi, and Chunichi are all general newspapers and The Nikkei is a business newspaper. 4 See Media Data 2009, p.10, Nikkei Inc.

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Consequently, the release of this information then causes an extremely rapid and large-scale price fall (crash). Conversely, negative corporate news that is continuously disclosed to outside investors immediately after the events occur should be smoothly incorporated into the price, rather than triggering a crash. The empirical evidence from the cross-country analysis demonstrates that accounting transparency mitigates the frequency of rm-specic crashes. In line with this argument, Hutton et al. (2009) demonstrate that discretionary accrual is positively related to crashes at the individual rm level in the US. Kothari et al. (2009) capture the scale of news by the percentage change in dividends and management forecasts, and nd that the scale of bad news is signicantly larger than that of good news, which is consistent with the managerial incentive to withhold unfavorable information. Cheng Chee Mun et al. (2011) nd that better voluntary disclosure prior to the earnings announcements leads to less price reactions in the Singapore market. These studies suggest that crashes are useful indicators to capture the timeliness of corporate information to be priced into nancial markets.5 2.2. Crash-reducing hypothesis We hypothesize that greater media coverage smoothes the capitalization of rm-specic information into the price. This hypothesis suggests that crash frequency decreases with the amount of media coverage because of the timely incorporation of information from the media into the price. This smoothing effect reects the argument made by Jin and Myers (2006) and Hutton et al. (2009) that enhanced accounting transparency contributes to reducing crash probabilities. In our view, not only accounting practices, but also the transmission of information to the public is important for smooth price movements. Active media reporting may improve the informational environment surrounding investors and thereby accelerate the incorporation of information into prices. More specically, as clearly argued by Miller (2006), the media can play the economic role of information provider, either by redistributing information from other news sources (e.g., rms, analysts, and so on), or by investigative journalism, i.e., discovering information on newsworthy items such as accounting fraud. In this context, if redistribution by the media attracts investors' attention, then stock pricing may occur in a timelier fashion and be more efcient through reecting more information. Moreover, if monitoring by the journalism profession prevents managers from keeping negative information secret, and bad news then reaches the public more quickly, price revisions should be more frequent, less sudden, and less drastic. In a related study, Chan (2003) demonstrates that, although markets respond to media reports, prices only tend to drift slowly downwards after bad news. Miller (2006) collates samples of accounting fraud and shows that markets respond more to press reports based on original research than they do to redistributed information. Tetlock et al. (2008) nd that the media can convey hard-to-quantify aspects of corporate information. In addition, Fang and Peress (2009) showed that press coverage in the US enhances the informational efciency of the stock market. Stocks for which there is no news earn excess returns, whereas stocks for which there is news earn normal returns. 2.3. Crash-inducing hypothesis As an alternative hypothesis, we study whether greater media coverage exacerbates extreme downward movements of stock prices. When crash frequency increases with media coverage, the crash-inducing hypothesis is supported. To understand the mechanism whereby media induces a crash better, we take into account the seasonal distribution of media reports. Recall that Jin and Myers (2006) predict that a crash takes place when a large amount of bad information becomes public in a short time interval following a no-news period. In line with this, the distribution of information ows should be associated with the crash frequency. If incremental information contributes to forming a more equal distribution over time, an increase in information ows should be related to a lower crash frequency. By contrast, if a large number of media reports are provided in a relatively short period, the active media reports should raise the crash frequency. To shed light on the impact

Wang et al. (2009) examine the scale of crashes for individual stocks, but focus rather on large-scale and market-wide crashes.

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of the distribution of information supplied by the mass media, our analysis uses a concentration (bias) measure of media coverage over time, in addition to the simple aggregated media coverage measure. 6 Several theoretical arguments help understand the potential positive effect of mass media on large stock price variations. As Hong and Stein (2007) concisely stated, given that the cognitive capability of investors is constrained, attention-grabbing information might cause an extremely large market response to corporate information. In particular, in our setting, intensive media coverage might induce more crashes or jumps. Some empirical studies on mass media demonstrate evidence on the association of media coverage with large stock market movements. Klibanoff et al. (1998) nd the price of closed-end funds reacts more sharply to the news covered on the front page of The New York Times. Chan et al. (2001) nd the daily volatility of the Hong Kong stock market increases with salient political news. More recently, Tetlock (2007) nds the content of newspaper articles has an overly pessimistic effect on investors by showing the negative overreactions and the return reversals. Bhattacharya et al. (2009) nd evidence that the media exposure of Internet rms was larger than that of non-Internet rms over the Internet bubble period, but the difference can account for only a small portion of large stock returns. Alternatively, Chen et al. (2001) propose the theoretical argument that crashes are induced by the differences of opinion among investors together with the short-sales constraints. In their model, the pessimistic investors information is not fully reected in the market, a transitory overvaluation occurs, and, eventually, the subsequent arrival of bad news results in the large drop in price. In fact, their empirical evidence, using trading volume as the proxy for disagreement, is supportive of their theoretical argument. Hong and Stein (2007) suggest that when the mass media widens the disagreement among investors on the interpretation of new information, a greater overvaluation occurs. Although determining whether crashes and jumps manifest information-efcient pricing or overreactions is beyond the scope and purpose of our analysis, several prior works that provide evidence on return predictability from Japan consistently suggest that crashes and jumps are likely to be the overreaction of investors. For example, the earlier work of Chang et al. (1995) nds that the loser portfolio outperforms the winner portfolio, constructed on a monthly return basis. Bremer et al. (1997) nd that return reversals occur after extremely large price changes with more than 10% daily returns from the sample rms in the Nikkei 300. Iihara et al. (2004) nd a return reversal in one-month intervals that is weakly associated with trading volume. Chiao and Hueng (2005) and Chou et al. (2007) demonstrate the protability of a contrarian strategy over a short-term interval. To explore the crash-inducing effect further, we conduct additional analyses in several ways. First, to examine what type of information is critical to inducing a crash, we investigate the interactive relationship between media coverage and disclosure information. Among various types of news sources, ofcial disclosure from corporations is supposed to be the most important source that the mass media intermediates for the public. In this sense, the analysis of disclosure is a valid approach to examining the rebroadcasting role of the media, as Miller (2006) states. In addition, we use the seasonality of media coverage to check the rebroadcasting role of the media, because the announcements of annual nancial results are clustered in a particular period around May in the Japanese market. 3. Empirical analysis 3.1. Data and variables 3.1.1. Data source The sample covers the corporations listed on the rst section of the Tokyo Stock Exchange over the three years from April 2003 to March 2006, excluding nancial institutions such as commercial banks, security houses, and insurance companies. We use sample rms for which the scal year ends in March, which is the practice adopted by the great majority of Japanese rms. The total number of rms in the
6 Several prior theoretical studies provide some rationale for why media reports are clustered toward a specic type of news. Baron (2006) constructs a model describing a bias of news media toward overemphasis on a particular event, which arises from the concerns of journalists to further their careers by attracting public attention. Mullainathan and Shleifer (2005) rationalize the media bias in terms of an additive slant given to information under the behavioral bias of readers who prefer to hear news consistent with their prior knowledge.

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sample is 1,081. In total, the sample has 3,049 rm-year observations. We count the total number of media coverage items and disclosures in each year from April to March in the sample period. The nancial statement data are from Nikkei Financial Quest. The data on ofcial disclosure are from Timely Disclosure Network (TD-NET) on the Tokyo Stock Exchange. This database contains document les that constitute public records of the timely disclosure systems of listed rms; included are full-year nancial results, interim results, revisions to management forecasts, and so on. 3.1.2. Crash and jump variables To calculate the rst key variable, crash frequency, we use stock price data from the Japanese Daily Stock Price Database provided by Nikkei Media Marketing. We construct two crash measures. The rst is simply crash frequency (CRASH FREQ). We then measure the jump frequency (JUMP FREQ) to examine extreme adverse price movements in comparison with crashes. To measure the variables at the rm level, we follow the methodology of Jin and Myers (2006) and Hutton et al. (2009) by calculating the rm-specic returns (abnormal returns) for each rm in each year by using the following market model: rit i i r m;t uit ; where rit is the daily return for rm i at date t, rmt is the market return at date t, and uit is the residual term. For rmt, we use the market portfolio return constructed by all the common stocks listed on the Tokyo Stock Exchange's rst and second sections. Assuming that abnormal returns from the market model are distributed normally, we use 0.1% and 0.01% as the threshold points to identify a crash. We count the frequency of falling under the respective thresholds on the left side of the distribution. For jumps, the right side of the distribution is used. The simple count measure used in prior studies cannot fully capture the scale of a crash. Thus, we construct an alternative measure to take into account the scale of the shock associated with each crash relative to total negative returns. Specically, the crash return share, CRASH SHARE, is dened as the share of cumulative returns falling within the crash region under the respective threshold, CARit , denomiCRASH nated by cumulative negative returns, CARit , as follows:
NEGATIVE

CRASH SHARE

CRASH

CARit CARit :

NEGATIVE

The jump return share (JUMP SHARE) is similarly calculated by using the cumulative jump return and total positive returns. We should note that, in this measurement, the rst and fth percentiles are used as the thresholds (noted as [1%] and [5%] hereafter), differently from the measurement of crash frequency, which uses the probabilities 0.1% and 0.01% under the normal distribution. The reason is that, if we use the probability threshold, it necessarily produces many zero share observations, as described in the following empirical analysis. Thus, the crash share variable denes the crash event relatively more widely than does the crash frequency. 3.1.3. Media coverage For the second key variable, media coverage, we use information from Nikkei Telecom 21 on the number of citations over one year in four commercial newspapers, The Nikkei, the Nikkei Business Daily, the Nikkei Finance Journal, and the Nikkei Marketing Journal (MEDIA). We can use the four-digit ticker code to count the number of articles reporting the sample rms in the Nikkei database system. 7 These papers are all published by Nikkei Inc., which is the largest newspaper company specializing in business and nance. Of the four newspapers, The Nikkei has the largest daily circulation (3,056,036 copies). Because the other papers tend to target professionals, their circulation is relatively small: 248,200 for the Nikkei Marketing Journal, 167,144 for the Nikkei Business Daily, and 102,495 for the Nikkei Finance Journal. 8 In addition, the
7 The search system in Nikkei Telecom 21 internally allocates the identier of companies cited in an article as a major topic, including the case where the company appears in the rst sentence. 8 Aman (2011) examines the effect of media coverage on rm-specic volatility by using the same database for Japanese rms.

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intertemporal bias of media coverage is used to measure the concentration of media reporting, because the bias of media reports over a few months is more important than is the aggregated quantity of media reports throughout the year when examining the short-term reactions induced in markets. This variable is dened as the standard deviation in the share of media coverage on a monthly basis (SD_MEDIA). 3.1.4. Disclosure variables Several variables representing ofcial disclosure are included in the regressions. We use the frequency of ofcial corporate disclosure to capture the amount of information publicly released. Specically, we count the number of documents publicly disclosed to investors on the stock exchange (DISCL). This is included because dramatic changes in returns can follow announcements of fundamental corporate events, which lead to revisions of expected future cash ows and risks. In addition, to measure the credibility of disclosed information, we use management's forecast errors (FCST_ERR). This is dened as the absolute value of average difference between realized and forecast earnings over the previous three years. As Jin and Myers (2006) and Hutton et al. (2009) show in the accounting context, better forecasting is expected to decrease crash frequency. Also, as Kato et al. (2009) report, the large majority of Japanese rms issue management forecasts. In this context, the forecast accuracy is suitable as an indicator of the credibility of disclosure. 3.1.5. Control variables We include several regressors used in existing models, such as those of Jin and Myers (2006), Hutton et al. (2009), and Wang et al. (2009). To incorporate the effect of crashes and jumps caused by large changes in earnings over the nancial year, we include the net prot divided by total assets (EARNING) and the change from the previous to current year (EARNING). These measures are expected to be positively related to jumps and inversely related to crashes. The turnover of trading volume (TURNOVER) is used as a liquidity measure, which is dened as the average ratio of trading volume to the number of shares outstanding on a daily basis. We expect increased liquidity to reduce the probability of a crash (jump) because lower trading costs render the information reected in the price held by investors more current. The total assets (ASSET) are used to capture rm size. Because investors in large rms continuously receive large volumes of information from participants such as security analysts and from other nancial institutions, crash (jump) frequency is expected to decline with rm size. We also include nancial leverage (LEVERAGE), dened as the ratio of outstanding debt to total assets, to capture the possibility that increased leverage risk generates large stock price falls. The market-to-book ratio of stock (MBRTO) is used to allow for extreme price falls caused by adjustments in overvaluation. A detailed description of the variables is provided in Appendix A. 3.2. Descriptive statistics Panel A in Table 1 shows the descriptive statistics. The mean value of crash frequency (CRASH FREQ), which is our key variable, is 0.706 for the 0.1% threshold, and the median is unity. As for the 0.01% threshold, the mean value is 0.303 and the median is zero. These gures indicate that the average rm does not experience a large-scale crash over the course of one year, and suggest that the crash dened by our standard is an unusual occurrence. The mean values of jump frequency (JUMP FREQ) are 2.337 and 1.299 for the 0.1% and 0.01% thresholds, respectively, which suggests that a crash is a rare event relative to a jump.9 Panel B describes the scale of returns for crashes and jumps on a daily basis. For example, the average return of crashes for the 0.1% (0.01%) criteria is 7.1% ( 8.5%) and the minimum value (the largest crash) is 25.9%. The daily crash return translates to a weekly return of 30.96%, which is comparable to the 22.74% found by Hutton et al. (2009) for a US sample. Turning to jumps, the average return for the 0.1% (0.01%) cutoff is 9.1% (11.1%) and the maximum value (the largest jump) is 72.4%. The weekly return value of 54.71% is remarkably larger than the 33.27% found by Hutton et al. (2009). Panel C shows the share of crash returns in all negative returns (CRASH SHARE). On average, the stocks within the rst percentile of all returns account for 9.5% of all negative returns. For the fth percentile

9 This difference may be because of our assumption that returns are distributed normally. We check the sensitivity of our analysis by alternatively assuming the log-normal distribution later.

H. Aman / Pacic-Basin Finance Journal 24 (2013) 2238 Table 1 Descriptive statistics. No. of obs. (A) Frequency of crashes and jumps CRASH FREQ [0.1%] 3049 CRASH FREQ [0.01%] 3049 JUMP FREQ [0.1%] 3049 JUMP FREQ [0.01%] 3049 (B) Daily return of crashes and jumps Crash return [0.1%] 2154 Crash return [0.01%] 923 Jump return [0.1%] 7124 Jump return [0.01%] 3962 Mean s.d. Min. 1st quartile Median 3rd quartile

29

Max.

0.706 0.303 2.337 1.299

0.813 0.549 1.355 1.061

0 0 0 0

0 0 1 1

1 0 2 1

1 1 3 2

5 4 8 7

0.071 0.085 0.091 0.111

0.034 0.038 0.054 0.062

0.259 0.259 0.013 0.016

0.014 0.019 0.724 0.724

0.064 0.082 0.075 0.092

0.049 0.059 0.106 0.132

0.014 0.015 0.724 0.724

(C) Cumulative abnormal return share of crashes and jumps CRASH SHARE [1%] 3049 0.095 0.021 CRASH SHARE [5%] 3049 0.289 0.032 CRASH SHARE [1%] 3049 0.135 0.040 CRASH SHARE [5%] 3049 0.371 0.060 (D) Other variables SD_MEDIA DISCL FCST_ERR EARNING EARNING TURNOVER ASSET (million Yen) MBRTO LEVERAGE

0.056 0.209 0.066 0.250

0.081 0.266 0.106 0.327

0.091 0.285 0.126 0.361

0.105 0.308 0.155 0.406

0.255 0.534 0.363 0.686

3049 3049 3049 3049 3049 3049 3049 3049 3049

0.068 20.456 0.018 0.024 0.006 0.005 377396.100 1.471 0.546

0.030 9.639 0.027 0.052 0.062 0.007 1039396 4.448 0.202

0.011 6 0.000 1.244 1.038 0.000 1182 0.204 0.044

0.046 14 0.006 0.011 0.004 0.002 50414 0.837 0.398

0.065 18 0.011 0.024 0.004 0.003 101251 1.135 0.553

0.085 25 0.021 0.042 0.014 0.005 256495 1.624 0.703

0.215 97 0.608 0.930 1.443 0.096 18900000 234.103 0.999

Note: CRASH FREQ: the frequency of market-adjusted daily returns falling under the respective thresholds on the left side of the normal distribution at 0.1% and 0.01%. JUMP FREQ: the frequency of market-adjusted daily returns falling under the respective thresholds on the right side of the normal distribution at 0.1% and 0.01%. CRASH SHARE: the share of cumulative returns falling within the crash region under the respective threshold at the 1st and 5th percentiles, to total negative returns. JUMP SHARE: the share of cumulative returns falling within the jump region under the respective threshold at the 1st and 5th percentiles, to total positive returns. DISCL: the number of documents publicly disclosed to investors on the stock exchange over one year. FCST_ERR: the management forecast errors. The absolute value of average difference between realized and forecast earnings over the previous three years. EARNING: the net prot divided by total assets. EARNING: the change in net prot divided by total assets. Turnover: the turnover of trading volume dened as the average ratio of trading volume to the number of shares outstanding on a daily basis. ASSET: the amount of total assets outstanding at current scal year end (million Yen). MBRTO: the market-to-book ratio of shareholders' equity. LEVERAGE: the ratio of outstanding debt to total assets.

threshold, the share of crash returns in all negative returns amounts to 28.9%. In positive territory, the mean values of JUMP SHARE are 13.5% and 37.1% for the respective threshold percentiles. This reects the fact that the average scale of a jump return is relatively large as compared with crashes, as is the frequency. Turning to the statistics for media coverage in Panel A in Table 2, of the four newspapers, it is The Nikkei that most frequently cites rms, with an average of 34.08 citations. This is followed by the Nikkei Business Daily (with a mean of 22.36). The Nikkei Finance Journal and the Nikkei Marketing Journal have much lower numbers of citations (with means of 7.94 and 3.20, respectively). In total, the mean value is 67.60 citations for all four papers. The median for all four papers is 36. The large difference between the mean and median is attributable to the distributions with long and heavy tails on the right-hand side. This skewness is caused by the observations on extremely high-prole well-known rms such as Sony. Hence, in our regression analysis, we use natural logarithms to adjust for this positive skewness (lnMEDIA). Panel B describes the seasonal pattern of media coverage on a monthly basis. This clearly indicates that the mass media tends to report corporate news in specic months, May and November, which are the months when full-year and interim half-year nancial results are released by many rms. This seasonality enables us to examine closely the effect of media on crashes in terms of different information types.

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Table 2 Descriptive statistics of media coverage. No. of obs. (A) Media coverage by newspaper title All four newspapers 3049 The Nikkei 3049 Nikkei Business Daily 3049 Nikkei Finance Journal 3049 Nikkei Marketing Journal 3049 Mean s.d. Min. 1st quartile Median 3rd Quartile Max.

67.603 34.087 22.369 7.946 3.202

101.524 56.891 40.802 6.362 8.978

7 3 0 0 0

24 12 5 5 0

36 18 11 6 0

67 32 23 9 1

1296 865 638 105 107

(B) Media coverage on a monthly basis: all four newspapers April 3049 6.113 10.964 May 3049 9.358 10.146 June 3049 5.102 10.385 July 3049 5.079 9.569 August 3049 5.117 8.508 September 3049 4.567 8.249 October 3049 5.318 9.932 November 3049 6.845 8.337 December 3049 4.344 8.425 January 3049 4.365 8.512 February 3049 5.444 8.240 March 3049 5.950 10.569

0 0 0 0 0 0 0 0 0 0 0 0

1 5 1 1 1 0 1 3 0 0 2 2

3 7 2 2 3 2 3 4 2 2 3 3

7 10 6 5 6 5 6 7 5 5 6 7

186 251 266 144 203 109 153 101 112 119 112 259

3.3. Correlations of crashes and jumps with media coverage Table 3 reports the correlations among our key variables: crashes, jumps, and media coverage. The correlation coefcient between crash frequency (CRASH FREQ [0.1%]) and media coverage (lnMEDIA) is 0.028. Likewise, CRASH FREQ [0.01%] indicates the negative correlation with media coverage though the scale is small. As for crash share variables (CRASH SHARE [1%] and [5%]), they also have a negative correlation with media coverage.10 These negative correlations are inconsistent with the crash-inducing hypothesis. However, the concentration of media coverage (lnSD_MEDIA) shows a positive correlation with crash frequency and share. This supports the notion that crashes and jumps are likely to occur when media reporting is intensive. For jumps, the frequency measures (JUMP FREQ [0.1%] and [0.01%]) and return shares (JUMP SHARE [1%] and [5%]) are negatively correlated with lnMEDIA. In contrast, the jump variables are all positively correlated with lnSD_MEDIA. 3.4. Multivariate regression results Because crash frequency is based on typical count data with discrete integer values, we t a Poisson regression model to our data. Table 4 reports our main estimation results, in which the t-statistics are computed by the cluster robust standard error to control for the possible heteroskedasticity across rms. Overall, the results clearly indicate that media coverage has a positive effect on the crash count. For example, in the model with the 0.1% threshold, the coefcient of lnMEDIA is positive and statistically signicant (coeff. = 0.261). When we calculate the marginal effect at the averages to assess the quantitative impact, a one-point increase in lnMEDIA, which is the change from 43 to 118 in the raw value of media coverage, is accompanied by an increase in crash frequency of 0.179. In the model with the 0.01% threshold, the estimated coefcient is positive and exceeds that in the model with the 0.1% threshold (coeff. = 0.385). These positive estimated coefcients support the crash-inducing hypothesis, which implies that more media reports induce more frequent and extremely large reactions to rm-specic information. We nd no evidence that media coverage contributes to smoothing the incorporation of information into prices. The effect of media coverage in increasing crashes is interesting, as it contrasts with the prior evidence of Jin and Myers (2006) and Hutton et al. (2009), who nd that better corporate disclosure practices decrease crash
10 Because of the high correlation coefcient between lnMEDIA and lnASSET (0.786, not tabulated), we need to control for the effect of rm size, as in the following multivariate analysis.

H. Aman / Pacic-Basin Finance Journal 24 (2013) 2238 Table 3 Correlation matrix. (1) (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) CRASH FREQ [0.1%] CRASH FREQ [0.01%] JUMP FREQ [0.1%] JUMP FREQ [0.01%] CRASH SHARE [1%] CRASH SHARE [5%] JUMP SHARE [1%] JUMP SHARE [5%] lnMEDIA lnSD_MEDIA 1.000 0.632 0.176 0.156 0.663 0.743 0.138 0.111 0.028 0.044 (2) (3) (4) (5) (6) (7) (8) (9) (10)

31

1.000 0.146 0.130 0.597 0.749 0.090 0.073 0.003 0.014

1.000 0.694 0.178 0.085 0.708 0.558 0.217 0.201

1.000 0.127 0.031 0.749 0.717 0.210 0.205

1.000 0.865 0.063 0.001 0.081 0.103

1.000 0.075 0.119 0.078 0.099

1.000 0.902 0.272 0.263

1.000 0.255 0.247

1.000 0.851

1.000

frequency. These opposite effects are worthy of note, given that both disclosure and media reports have a common role of providing information to investors. To look close at the effect of media coverage, we include another variable to capture how intensively the mass media reports on a rm (lnSD_MEDIA). The coefcients of lnSD_MEDIA are all positive and statistically signicant (coeff. = 0.237 and 0.258 for CRASH FREQ [0.1%] and [0.01%], respectively), which supports the argument that the media reports with a concentrated distribution exacerbate stock price reactions to bad
Table 4 Estimation results for crash and jump frequency using the Poisson model. Independent variable CRASH FREQ [0.1%] Coeff. [t-value] lnMEDIA lnSD_MEDIA lnDISCL FCST_ERR lnASSET LEVERAGE lnMBRTO EARNING EARNING TURNOVER FY2005 FY2006 Constant 2 Log likelihood No. of obs. 0.2616*** [4.21] 0.2371*** [2.96] 0.1682*** [3.02] 3.5885*** [ 3.27] 0.1654*** [ 5.15] 0.098 [ 0.80] 0.0856* [ 1.96] 0.5789 [ 1.09] 1.4152** [ 2.24] 7.4786** [ 2.05] 0.2758*** [5.05] 0.3095*** [5.38] 0.7420*** [2.60] 134.66*** 3279.572 3049 CRASH FREQ [0.01%] Coeff. [t-value] 0.3858*** [4.15] 0.2584** [2.00] 0.3203*** [3.70] 3.2011* [ 1.94] 0.2605*** [ 5.13] 0.1028 [ 0.54] 0.0683 [ 1.04] 0.3934 [0.49] 2.4034*** [ 2.89] 6.2512 [ 1.14] 0.4544*** [5.13] 0.4926*** [5.22] 0.0299 [ 0.07] 98.59*** 2058.164 3049 JUMP FREQ [0.1%] Coeff. [t-value] 0.0122 [0.36] 0.0262 [0.60] 0.0526** [2.08] 0.3548 [0.62] 0.1418*** [ 8.81] 0.4925*** [7.78] 0.0718*** [ 3.35] 0.1424 [0.49] 0.3621* [1.76] 9.2299*** [6.77] 0.0112 [ 0.46] 0.0924*** [3.55] 2.0174*** [13.47] 476.80*** 5033.57 3049 JUMP FREQ [0.01%] Coeff. [t-value] 0.0755 [1.45] 0.0757 [1.11] 0.0347 [0.94] 1.0638 [1.57] 0.2159*** [ 9.85] 0.8203*** [9.52] 0.1758*** [ 4.67] 0.1387 [0.37] 0.2509 [0.87] 11.2984*** [6.47] 0.0014 [0.04] 0.1420*** [3.63] 2.0192*** [10.14] 584.49*** 4104.875 3049

Note: ***, **, and * denote statistical signicance at the 1%, 5%, and 10% levels, respectively. The t-values in square brackets are computed by the cluster robust standard error.

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H. Aman / Pacic-Basin Finance Journal 24 (2013) 2238

news. In other words, when media coverage is more equally distributed over time, it is likely to diminish crash occurrences. The right-hand side of Table 4 reports the results for jump frequency. The estimated coefcients of media coverage are statistically insignicant. Overall, it is unlikely that media coverage causes more frequent extreme upward movements in stock prices. This result is consistent with Hutton et al. (2009), who nd no evidence of the effect of disclosure transparency on jumps. Taken together with the crash results, it appears that the media plays a more important role in disseminating bad news to depreciate equity value rather than good news. Specically, this asymmetric relationship between crashes and jumps may be partly attributable to the notion put forward by Kothari et al. (2009), who argue that corporate managers have incentives to disclose good information in a timely fashion, but are reluctant to disclose bad information. That is, the better disclosure practice of corporations themselves for good events relative to bad ones enables the stock market to fully incorporate the good information, which in turn may reduce the additional inuence of the press media on pricing. Turning to the effect of ofcial disclosure, the coefcients of lnDISCL on crashes are all positive and signicant statistically. This indicates that an increase in the disclosure of information, as well as media coverage, is likely to prompt stock price crashes. For jumps, lnDISCL has positive and marginally signicant coefcients. This weakly suggests that ofcially disclosing favorable information to investors prompts extreme upward changes in the share price. The increased earnings forecasts error (FCST_ERR) reduces the frequency of crashes, which is inconsistent with our prior expectation that credible disclosure practices prompt the timely reection of information. The estimated coefcients of the other control variables are summarized as follows. The coefcients of lnASSET are negative both for crashes and jumps. This indicates that, for large rms' stocks that receive high publicity, attracting attention is good for smoothing the pricing of information. The change in earnings, EARNING, is negatively correlated with crashes and positively correlated with jumps. This indicates that, as predicted, reduced (increased) earnings are associated with the crash (jump) frequency through the reection of fundamental protability changes. The estimated coefcients of TURNOVER indicate that increased liquidity tends to lower the crash frequency, as expected, but raises the jump frequency. A higher market-to-book ratio (lnMBRTO) leads to less frequent crashes and jumps. The prediction that a quick and large adjustment is caused by temporarily misvalued stocks is likely to be true only for undervaluation. Next, we examine the scale of crash returns. Table 5 reports OLS results for regressions in which the crash share (CRASH SHARE) and the jump share (JUMP SHARE) are used as dependent variables, with the same regressors as in the Poisson model. Similarly to crash frequency, media coverage is positively associated with the crash return share (e.g., coeff. = 0.0075 for the rst percentile). These estimates support the crash-inducing hypothesis in terms of the scale of crashes. That is, increased media coverage is likely to exacerbate crash returns, as well as increase crash frequency. The estimated slope coefcient is translated to the economic scale of a 0.287 standard deviation increase in CRASH SHARE [1%] responding to one standard deviation (s.d.) increase in lnMEDIA. The concentration of media coverage lnSD_MEDIA is positively and signicantly associated with the crash share (e.g., coeff. = 0.0079 for CRASH SHARE [1%]). Again, this supports the argument that more concentrated media reports increase the scale of crashes in terms of the size of returns. For jumps, lnMEDIA has a positive effect that is highly statistically signicant. lnSD_MEDIA also has a positive and signicant coefcient, which contrasts with its insignicant effect in the case of jump frequency models. This may be interpreted as indicating that media coverage of good news is clustered around a narrower scope of information than is media coverage of bad news and, thus, an incremental media report on good information is less inuential for inducing more frequent additional jump occurrences. On the other hand, the increased media reports of good news may generate a large reaction to individual information, as measured by our jump return share variable. 3.5. Further analysis of the crash-inducing effect To further investigate our nding that the media increases crash frequency and the scale of returns, several additional models are tted. The results are reported in Table 6. First, we examine the interactive effect between media coverage and disclosure by including the appropriate cross-terms. In this way, we can determine whether the media effect is related to the fundamental information manifested in ofcial

H. Aman / Pacic-Basin Finance Journal 24 (2013) 2238 Table 5 Estimation results for crash and jump return share using OLS. Independent variable CRASH SHARE [1%] Coeff. [t-value] lnMEDIA lnSD_MEDIA lnDISCL FCST_ERR lnASSET LEVERAGE lnMBRTO EARNING EARNING TURNOVER FY2005 FY2006 Constant adj. R2 F-value No. of obs. 0.0075*** [5.46] 0.0079*** [4.46] 0.0045*** [4.37] 0.0293 [1.64] 0.0047*** [7.59] 0.0004 [0.17] 0.0020** [2.54] 0.0202* [1.71] 0.0296*** [2.59] 0.0158 [0.26] 0.0078*** [8.97] 0.0094*** [9.71] 0.1273*** [24.81] 0.0916 19.68*** 3049 CRASH SHARE [5%] Coeff. [t-value] 0.0128*** [6.13] 0.0138*** [5.29] 0.0056*** [3.57] 0.0822** [2.40] 0.0074*** [7.55] 0.0045 [1.22] 0.0042*** [3.25] 0.0450** [2.28] 0.0344** [2.14] 0.5345*** [5.02] 0.0138*** [10.29] 0.0177*** [11.62] 0.3475*** [41.78] 0.1175 24.95*** 3049 JUMP SHARE [1%] Coeff. [t-value] 0.0071*** [3.19] 0.0068** [2.30] 0.0014 [0.86] 0.0519 [1.32] 0.0123*** [13.01] 0.0388*** [9.07] 0.0112*** [5.94] 0.0068 [0.23] 0.0062 [0.26] 1.3159*** [9.24] 0.0070*** [4.29] 0.0098*** [5.80] 0.2350*** [25.69] 0.2565 70.24*** 3049

33

JUMP SHARE [5%] Coeff. [t-value] 0.0115*** [3.38] 0.0108** [2.48] 0.0014 [0.60] 0.0813 [1.19] 0.0202*** [13.46] 0.0586*** [9.38] 0.0133*** [5.16] 0.0043 [0.11] 0.0283 [0.97] 2.4896*** [10.46] 0.0061*** [2.81] 0.0146*** [5.80] 0.5397*** [38.53] 0.3246 85.60*** 3049

Note: ***, **, and * denote statistical signicance at the 1%, 5%, and 10% levels, respectively. The t-values in square brackets are computed by the cluster robust standard error.

disclosures, which is assumed to be similar to the rebroadcasting information in Miller's (2006) classication. CRASH SHARE and JUMP SHARE are used as dependent variables and OLS is adopted, as the exact interactive effect is not measured by the coefcient of the cross-term in the nonlinear model, as is the Poisson regression.11 The coefcients of the interaction terms in the crash models are positive and signicant for media coverage and its concentration (lnMEDIA lnDISCL, lnSD_MEDIA lnDISCL). This suggests that the effect of media coverage on crashes is enhanced by disclosure frequency. Put another way, when more corporate information is ofcially disclosed, incremental media coverage contributes more strongly to increasing crash frequency. Rather than completely original investigations, it may be that the redistribution of information announced by rms drives large market reactions, although the media could add their own interpretations or analyses to the disclosed information to some extent. In contrast, for JUMP SHARE, the cross-terms show a lack of signicance, which suggests that the jump-inducing effect of the media reporting good news may come from information sources other than corporate disclosure. Finally, we examine seasonal variations in media reporting throughout the year. Recall that media coverage in May is high, probably because the sampled rms that have accounting periods ending in March usually announce full-year nancial results in May. Hence, the disclosure of earnings, which represents the most fundamental information, appears to be clustered in May. To incorporate this effect of seasonality into our regression analysis, we separate media coverage into two periods, May and other months. 12 Table 7
11 12

See Ai and Norton (2003). One is added to MEDIA [May] and [Others] before taking the natural logarithm.

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H. Aman / Pacic-Basin Finance Journal 24 (2013) 2238

Table 6 Results with interaction between media coverage and disclosure. Independent variable CRASH SHARE [1%] Coeff. [t-value] lnMEDIA lnSD_MEDIA lnMEDIA lnDISCL lnSD_MEDIA lnDISCL lnDISCL 0.0165** [ 2.40] 0.0286** [ 2.56] 0.0078*** [3.41] 0.0119*** [3.11] 0.008 [1.59] CRASH SHARE [5%] Coeff. [t-value] 0.0107 [ 1.17] 0.0286* [ 1.80] 0.0076** [2.58] 0.0139*** [2.63] 0.0153* [1.92] JUMP SHARE [1%] Coeff. [t-value] 0.0155* [1.69] 0.0326* [1.92] 0.0027 [ 0.93] 0.0086 [ 1.56] 0.0123 [ 1.51] JUMP SHARE [5%] Coeff. [t-value] 0.0231* [1.76] 0.0440* [1.85] 0.0038 [ 0.89] 0.0111 [ 1.41] 0.0152 [ 1.27]

shows the regression results obtained when including these two media variables. For the Poisson crash count model in Panel (A), the coefcient of lnMEDIA [May] is signicantly positive (e.g., coeff. = 0.192 for CRASH FREQ [0.1%]). However, the coefcient of lnMEDIA [Others] is relatively small and only marginally signicant (e.g., coeff. = 0.124). The marginal effects at the median value for CRASH FREQ [0.1%] are 0.130 for May and 0.085 for the other months. This suggests that crash frequency is amplied by investor reactions to the disclosure of fundamental information in accounting results intermediated by the media. For the CRASH SHARE model in Panel (B), the coefcients of media coverage in both May and the other months are positive and signicant. In contrast with crash frequency, the crash scale depends more heavily on the media reports in the other months, rather than those in May. To precisely compare the economic scales, an increase of one standard deviation in lnMEDIA [May] generates a 0.082 s.d. increase in CRASH SHARE [1%] and the normalized effect of lnMEDIA [Others] is a 0.224 s.d. increase. Similarly, for CRASH SHARE [5%], the normalized effect of May is smaller than that of the other months. Turning to jump frequency, for the Poisson model, only the coefcient in lnMEDIA [Others] is positive, although at a marginal signicance level for JUMP FREQ [0.01%]. As for the jump return share, the effect of May is insignicant, but in the other months, media coverage has a signicantly positive impact on jump returns. The remarkable economic impacts in the other months are clearly contrasted with crash returns. Taken together with the similar ndings regarding the cross-effects of disclosure with media coverage, jumps are likely to be caused by media reports of good news items that are unrelated to accounting information such as positive earnings surprises. 3.6. Robustness checks To check the robustness of the regression results, we tted various alternative variables both for crash/ jump measures and media coverage. The results are not tabulated to save space. First, to check the sensitivity of our results to the returns-generating model used, we applied the FamaFrench (FF) three-factor model to estimate crash and jump frequency. The specication is as follows:   rit rf ;t i 1;i r m;t r f ;t 2;i r SML;t 3;i r HML;t uit ; where rit is the daily return, rft is the risk-free rate measured by the 10-year-maturity government bond yield, rmt is the market portfolio return, rSML,t is the size factor, and rHML,t is the market-to-book factor. The FF crash-frequency measure is highly correlated with the market-model measure. The correlation coefcients are 0.796 and 0.844 for the 0.1% and 0.01% thresholds, respectively. The crash frequency from the FF model is slightly below that from the market model because the former additionally controls for

H. Aman / Pacic-Basin Finance Journal 24 (2013) 2238 Table 7 Results with separate media coverage for May. (A) Poisson model with crash and jump frequency CRASH FREQ [0.1%] Coeff. [t-value] lnMEDIA[May] lnMEDIA[Others] lnSD_MEDIA lnDISCL 0.1912*** [4.20] 0.1245* [1.87] 0.1723* [1.89] 0.1625*** [2.92] CRASH FREQ [0.01%] Coeff. [t-value] 0.2869*** [3.75] 0.1701 [1.55] 0.1509 [0.98] 0.3151*** [3.63] JUMP FREQ [0.1%] Coeff. [t-value] -0.030 [-1.32] 0.0263 [0.75] 0.039 [0.80] 0.0552** [2.18] JUMP FREQ [0.01%]

35

Coeff. [t-value] -0.0367 [-1.12] 0.0984* [1.85] 0.1104 [1.46] 0.0369 [1.00]

(B) OLS with crash and jump return share CRASH SHARE [1%] Coeff. [t-value] lnMEDIA[May] lnMEDIA[Others] lnSD_MEDIA lnDISCL 0.0028*** [3.51] 0.0054*** [3.82] 0.0075*** [3.80] 0.0044*** [4.31] CRASH SHARE [5%] Coeff. [t-value] 0.0056*** [4.57] 0.0086*** [4.05] 0.0126*** [4.37] 0.0055*** [3.49] JUMP SHARE [1%] Coeff. [t-value] -0.0006 [-0.41] 0.0075*** [3.23] 0.0083** [2.55] 0.0015 [0.92] JUMP SHARE [5%] Coeff. [t-value] -0.0018 [-0.84] 0.0123*** [3.46] 0.0133*** [2.76] 0.0017 [0.70]

Only the results of media coverage and disclosure are reported and the others are not shown. Note: ***, **, and * denote statistical signicance at the 1%, 5%, and 10% levels, respectively. The t-values in square brackets are computed by the cluster robust standard error.

size and market-to-book effects (the means are 0.601 and 0.264 for the 0.1% and 0.01% thresholds, respectively). In the Poisson regression, the estimated coefcients of media coverage are all positive and statistically signicant for both thresholds. This conrms our main nding that increased media reporting raises crash frequency. Another check for crash and jump frequency involves assuming a log-normal distribution rather than the standard normal distribution assumed by Jin and Myers (2006), because the stock price level is bounded at zero. By doing this, we predict that more frequent negative returns will be counted as crashes and less frequent positive returns will be counted as jumps. In fact, the average values of the crash and jump frequencies in the case of the 0.1% cutoff are 0.805 (0.706) and 2.215 (2.337), respectively, for the log-normal (standard normal) distribution. The regression result remains qualitatively similar to the previous results, in which both media coverage and concentration have positive impacts on crashes. As an alternative to the media coverage variable, we utilize the number of characters in the texts to take account of the information quantity in a press article. 13 To construct this variable, we make minor adjustments. When an article consists of a summary table containing the earnings performance of many rms, its number of characters is quite large relative to a normal text article. In addition, for some articles, the database reports zero characters due to a missing text article. Therefore, we replace the original character values of articles with summary tables and zero values by the mean value of normal articles over the year. Overall, the regression results are similar to the previous article count case, except that the statistical signicance of lnSD_MEDIA becomes weak in the crash-frequency model. We also considered the potential endogeneity of media coverage. That is, media coverage may be caused, in part, by crashes. This occurs because large and sudden movements in stock prices attract media
13 The database does not provide information on the number of words, probably because the words in a sentence are not separated by spaces in the Japanese language.

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attention. To address this type of issue, Engelberg and Parsons (2011) utilize location data on newspaper outlets and investors and then successfully nd that media coverage has a causal impact on market responses. Unfortunately, because such detailed data are not available to us, we reconcile the possible endogeneity by partly taking into account the contents of newspaper headlines. In Japanese stock markets, daily price limits are imposed on price changes to prevent extreme price movements. For instance, for stocks nominally ranging in price from 100 to 200 Yen, uctuations are constrained to within 50 Yen (up and down). Thus, stocks trading near the limits should be big news for investors. Hence, we eliminated from media coverage the articles with headlines containing the phrases lower limit trading and upper limit trading (in Japanese, STOP-YASU and STOP-DAKA). Because using this modied measure of media coverage provides qualitatively similar results to our previous results, it also supports the crashinducing hypothesis. 4. Conclusion The economic role of the media in the stock market has been increasingly examined, but it nevertheless remains an underexplored issue in the nance literature. In this study, we investigated the impact of media coverage on stock price behavior, focusing particularly on crash and jump frequency. The underlying notion is that, in terms of the timing of price changes in nancial markets, it is desirable for stock markets that rm-specic information be sequentially incorporated into prices immediately after a fundamentalsrelated change occurs inside the rm. To extend the prior examinations of corporate disclosure (Jin and Myers, 2006; Hutton et al., 2009) to the information diffusion process via the mass media, we constructed two measures of media coverage, the aggregated count and media concentration, and then examined their impacts on crashes and jumps. Our ndings are summarized as follows. 1. As the rst primary result, we found that crash frequency tends to increase with media coverage. This nding suggests that media coverage prompts investors' extremely large reactions to information. The seasonal concentration of media coverage also increases the crash frequency, which suggests that crashes are caused by intensive media reports. When using the share of crashes in all negative returns as an alternative measure of crash depth, we conrmed the crash-inducing effect of media coverage. 2. In contrast, for positive jump frequency, we failed to nd evidence of media coverage effects. This suggests that good news in the media is unlikely to induce extreme price increases. However, the share of jump returns is positively and signicantly affected by media coverage. 3. In a further analysis, we then examined what type of information ow via the mass media is critical for crash occurrences. Media reports are likely to inuence crash returns in an interactive way with ofcial corporate disclosure. In addition, we found that the relationship between crash frequency and media coverage is prominent in May, when full-year nancial results are often publicized. Taking these ndings together, we argued that the media effect on crashes is generated by the intensive rebroadcasting of nancial information such as earning results via the press media. 4. Finally, for jumps, the cross-term of disclosure and media coverage shows no evidence of interactive effects. In addition, media coverage in months other than May has a larger inuence on jumps than does media coverage in May, which differs from the results for crashes. The provision of good news by the media from the original information sources, i.e., other than ofcial disclosures, is likely to induce jumps, whereas accounting information such as positive earnings surprises are routinely incorporated in price in a timely fashion and, thus, media reports have only a negligible inuence. Acknowledgements Earlier versions of this paper were presented at The Japan Society of Monetary Economics, Asian Finance Association, Japan Finance Association West region seminar, Monetary Economics Workshop, Kansai University and Nagoya University. I appreciate useful comments from Eiji Okuyama, Katsuhiko Okada, Yoshiro Tsutsui, Taizo Motonishi, Nobuyoshi Yamori, Katsutoshi Shimizu and seminar participants. I also thank the editor, Ghon Rhee and anonymous referees for valuable suggestions. This research was nancially supported by the grant-in-aid for scientic research from Ministry of Education, Culture, Sports, Science and Technology in Japan.

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37

Appendix A. Denitions of variables

CRASH FREQ [0.1%] or [0.01%] JUMP FREQ [0.1%] or [0.01%] CRASH SHARE [1%] or [5%] JUMP SHARE [1%] or [5%] MEDIA SD_MEDIA DISCL FCST_ERR EARNING EARNING TURNOVER ASSET LEVERAGE MBRTO

The frequency of abnormal returns falling into the lower tail ([0.1%] or [0.01%]) of the normal distribution over the year on a daily basis. The frequency of daily abnormal returns falling into the upper tail ([0.1%] or [0.01%]) of the normal distribution over the year on a daily basis. The share of negative returns falling below the rst percentile or fth percentile in the sum of all negative returns. The share of positive returns falling below the rst percentile or the fth percentile (in descending order) in the sum of all positive returns. The number of articles reporting on the rm over the year in The Nikkei, the Nikkei Marketing Journal, the Nikkei Business Daily, and the Nikkei Finance Journal. The standard deviation of monthly media coverage over the year. The number of documents publicly disclosed on the stock exchange over the year. The absolute value of the average difference between realized and forecast earnings over the previous three years. The net prot divided by total assets. The change in net prot divided by total assets from the previous to current year. The average ratio of trading volume to the number of shares outstanding on a daily basis. Outstanding total assets value (million Yen). The ratio of outstanding debt to total assets. The market value of all stocks issued divided by the book value of shareholders equity.

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