Cover stories as an investment indicator : an investigation of companies listed on the Johannesburg Stock Exchange

Abstract

Investors rely on secondary information sources, like cover stories, as market indicators due to time, information and resources constraints. However, studies in the US market gave mixed results about the potential use of cover stories while no publish research could be found in South Africa related to investors reaction to cover stories or whether an understanding of investment periods, company specific characteristics or bounded rational behaviour would yield superior abnormal returns from cover stories.In total, 1218 cover stories related to publicily listed companies were recorded from FinWeek and Financial Mail for the period 1985 to 2008 and categorised based on the Likert scale developed by Arnold et al. (2007). Event study methodology was used in the research.The research found evidence that investors did pay attention to very optimistic cover stories. Positive an neutral cover stories were contrarian indicators, while negative cover stories were momentum indicators of future company investment performances and the abnormal returns for an investment portfolio based on these cover story effects were optimised by short-selling cover story companies from healthcare, general retail and general mining industries and buying shares in control companies from the same industries and company sizes. The ability to earn long-term abnormal returns proofed weak form market inefficiency for the JSE. Copyright