Four-Fold News Sentiment and Stock Returns

In this article, the authors construct a firm-level monthly news sentiment score by aggregating data from four independent data providers. They find that stocks with more positive news sentiment have higher expected returns. This result holds across each individual dataset and is strongest for the aggregate measure. The relationship is more pronounced for stocks with lower investor attention or higher arbitrage constraints. Positive sentiment also signals better future earnings and lower risk. These results suggest that the predictability of news sentiment for future stock returns is most likely because of the slow diffusion of fundamental information embedded in the news.