Does Context Matter? Evidence from Internet Research Activity by Sophisticated Investors

Abstract

Using a unique dataset of internet research on business media sites matched to the identities of investors, we argue that broadly available media content can help sophisticated investors generate private information. Prior work finds that adverse selection increases at earnings announcements because some traders make superior assessments of firm value based on the disclosure. We find a positive relation between sophisticated investors’ pre-earnings announcement gathering of industry-relevant, “contextual” information and illiquidity at the time of the announcement, suggesting this specific source of public information provides some investors with a comparative advantage in interpreting earnings announcements.

Keywords: earnings announcements, adverse selection, sophisticated investors, media, liquidity, information acquisition, technology

JEL Classification: G14, M41, D83