Research Determines Media Coverage Affected Banks' Stock Performance During Financial Crisis
When representatives from Bloomberg News and the Federal Reserve meet for an appeals hearing on Monday, they'll debate for the second time whether confidential information the Fed possesses could pose "imminent harm" to banks if made public.
Via the Freedom of Information Act (FOIA), Bloomberg argued in the original lawsuit that the information – identities and other details of companies that participated in the Fed's emergency lending programs – should be made public; Manhattan Chief U.S. District Judge Loretta Preska agreed. The Fed's stance in the 2009 case was that the information Bloomberg sought qualified for an exemption from FOIA because its disclosure would harm the institutions.
The judge's decision hinged critically on the determination of whether the release of the information might be damaging. "The [Fed] must provide evidence that if the requested information is disclosed, competitive harm would be "imminent", Judge Preska wrote in her decision. "Conjecture, without evidence of imminent harm, simply fails to meet the [Fed's] burden [of proof]."
Kogod Professor Robin Lumsdaine's recently published paper on the effect of media coverage on banks' stock performance begs to differ.
Lumsdaine, the Crown Prince of Bahrain Professor of International Finance, compared readership statistics on Bloomberg news stories about 30 of the largest US banks to the banks' stock performance from August 2007 through August 2008. She released the results of her research in October in a paper entitled "What the Market Watched: Bloomberg News Stories and Bank Returns as the Financial Crisis Unfolded."
Lumsdaine gathered the publicly-available Bloomberg data while Associate Director in the Banking Supervision and Regulation Division at the Federal Reserve before leaving in August 2008. The data collection occurred prior to, and independent of, the filing of the Bloomberg news lawsuit.
"I was writing up my results last summer when I learned of the existence of the Bloomberg lawsuit via the announcement of the decision; I realized my findings had implications for it," Lumsdaine recalled.
When she compared daily news interest in the banks with their stock performance, Lumsdaine found that banks that averaged relatively high readership interest had returns that were about 20 percentage points lower than banks that remained relatively out of the spotlight.
She showed how trading a portfolio based on shorting the stocks of banks that had the highest previous day's readership and longing those that didn't would have produced superior excess returns.
"The harm is immediate even for publicly available news," Lumsdaine said. She also cited studies of the run on UK bank Northern Rock following the news report that it had sought relief from the bank of England in August 2007.
In sum: greater news readership was associated with both lower returns and higher volatility of returns.
The power of perception is something Lumsdaine's observed since her time at Deutsche Bank, where in her role as strategist she often used research and evidence to debunk commonly-held views. "Clients would call concerned about something they had read in the morning's paper and it was up to me to corroborate or refute the claim through careful analysis," she described.
"I'm interested in market perceptions and understanding and how they might influence policy effectiveness," Lumsdaine said. "I began collecting the data to see whether the market's impressions matched what we were observing at the Fed."
An appeal of a similar case involving Fox News – which originally was decided in the Federal Reserve's favor – will also be heard on January 11 at the 2nd Circuit Court of Appeals in New York. Judge Alvin Hellerstein, the judge that presided over the FoxNews case concluded "The Board's concerns, that rumors are likely to begin and runs on banks are likely to develop, cannot be dismissed."
Though Lumsdaine's research won't directly feature in the appeals being heard Monday, it has some clear implications for those and other pending FOIA cases involving the Federal Reserve.