CFA Institute Journal Review August 2013 Volume 43 Issue 3
Do Investment Newsletters Move Markets? (Digest Summary)
One investment newsletter provides recommendations based on U.S. SEC filings that disclose heavy insider trading. The authors find statistically significant evidence of excess returns and high trading volume around the newsletter announcement period.
The authors examine whether investment newsletters affect markets by exploring a newsletter that focuses on recommendations driven by U.S. SEC data on insider trades. They conclude that despite the relatively small circulation of the newsletter and the publicly available nature of the data underlying its recommendations, the recommendations in the newsletter seem to produce significant excess returns in the short term.
How Is This Research Useful to Practitioners?
Sorting out the impact of various sources of information on retail investors and corresponding short- and long-term impacts on market prices is an ongoing challenge for academic researchers and investment professionals. In an attempt to tease out some of the strands of cause and effect, the authors choose to focus on an investment newsletter with a well-defined investment approach and a subscription base of around 10,000 individuals.
The newsletter in question includes recommendations of stocks that have recently experienced sizeable insider purchases. The recommendations are based mainly on information from Form 4 SEC filings. Since June 2002, insiders have been required to complete these filings electronically by the close of business on the trading day following the actual insider trade. The 220 recommendations analyzed cover the period from November 2001 to December 2010.
The authors find that the firms singled out by the newsletter actually do experience statistically significant positive announcement returns and increased trading volume around the time of the newsletter announcement. The announcement effect seems to last for approximately 13 trading days. Considering whether the newsletter announcement could coincide with other, more relevant activities, the authors note that there is no increase in the number of analyst reports or newswire stories concerning the recommended firms in the 60 days surrounding the newsletter announcement and no evidence of significant institutional holdings for the quarter that includes the newsletter announcement. Furthermore, the authors find a weak negative announcement effect when the newsletter includes a recommendation to exit a previously recommended position.
How Did the Authors Conduct This Research?
By design, the authors’ research is narrowly focused: After reviewing some general information about the investment newsletter industry, they examine 220 newsletter recommendations from one newsletter from November 2001 to December 2010. Each of these newsletter recommendations describes trading activity by executives, directors, and beneficial owners and provides information about the particular insider and company, as well as the industry and the economy in general. The authors put the newsletter recommendations within the context of overall insider transactions during the period in question and compare the characteristics of the newsletter recommendations with those of all insider transactions. The biggest difference they find is that the return on assets for the newsletter-recommended firms is significantly higher than the overall average return for firms with heavy insider trading activity.
The authors examine excess turnover and find that excess relative daily turnover peaks on the date of the newsletter recommendation. They also look at two sets of sell recommendations promulgated by the newsletter and conclude that there is weak evidence of a negative sell announcement period return as well.
Although focused primarily on announcement-period returns, the authors consider how the newsletter-recommended stocks performed over the period of analysis. Using a four-factor regression model, they find that a newsletter-recommended portfolio would have produced a slightly below-market return, not including the $995 price of the newsletter’s annual subscription.
It would be interesting to see what other academic researchers would find when pursuing similar lines of investigation to determine whether the conclusions reached by the authors merely reflect an aberration related to the particular newsletter studied or are part of a more widespread impact by investment newsletters in general. On the one hand, investment professionals interested in identifying short-term excess returns might find such opportunities intriguing. On the other hand, advisers and retail investors interested primarily in focusing on long-term returns and keeping costs low would likely view the authors’ research as confirmation of their belief that simplicity trumps complexity for the average individual investor.