Cover stories as effective contrarian indicators : a replication study in a South African context

Abstract

The contrarian model assumes that inferior (superior) past performance can be used as a good indicator of future superior (inferior) performance. In this regard, recent research has integrated the relevance of business magazine cover stories as a possible indicator of this performance, serving as a signal to investors to adopt a particular contrarian investment strategy. This research study replicates with extension a United States-based study that examined whether cover stories acted as effective contrarian indicators. Cover stories from the Financial Mail were collected for a ten-year period to determine whether the nature of the content (classified as either negative, positive or neutral) can act as a useful predictor of future investment performance. The event study method was used to establish whether this future performance was contrarian or momentum in nature, by adjusting the featured company holding-period returns with three benchmark measures: the FTSE-JSE All Share index; a sector-specific index; and an industry-size-matched (ISM) peer company. Statistical tests suggested that while positive stories provided evidence of momentum holding-period return (HPR) performance, negative stories showed weak evidence of contrarian performance for a two-year period. However, when HPR was adjusted for sector or ISM index, most of the abnormal returns dissipated, with only weak evidence of contrarian performance for positive stories and momentum performance for negative stories. The results validated those of the United States-based study, that suggested that magazine cover stories do not function as suitable indicators of either momentum or contrarian performance. Copyright