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The impact of innovation news coverage on illiquid stocks: the case of US market

Author

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  • Elena Fedorova
  • Valentin Stepanov

Abstract

Purpose - The purpose of this study is to determine stock market reactions to the news about innovations and other types of publications for illiquid stocks. Design/methodology/approach - (1) The authors opt for machine learning techniques and expert analysis and propose their own lexicon of innovations based on the news articles published on the professional website; (2) the dataset consists of the data on 2,000 US companies for 6 years; (3) the text analysis including BERT and Top2 Vec models which are superior to Latent Dirichlet allocation (LDA) in information criteria allows for more accurate evaluation of news sentiment and idea; and (4) furthermore, random forest and gradient boosting were applied to increase validity of results and demonstrate factor importance. Findings - (1) The paper presents theoretical findings adding to signalling theory and efficient market hypothesis for US illiquid stocks; (2) this study suggests that information on product innovations (unlike other types of innovations) has a direct and significant effect on the return of illiquid stocks; (3) the results also give evidence that under uncertainty innovation-related publications do not affect the return of illiquid stocks; and (4) the analysis of the news topics (narratives) demonstrates that only the narrative related to important corporate announcements has a positive impact on the return of illiquid stocks. Originality/value - (1) The authors are the first to conduct a large-scale study of the impact of various information on the return of illiquid stocks; (2) the paper focuses on information on several types of innovations with regard to the return of illiquid stocks; (3) based on Top2 Vec model, this study identifies the key topics-narratives discussed by investors and assesses their impact on the return of illiquid stocks; and (4) as an information source, the authors use the sample comprising a total of 1.4m news articles released on the professional website for investors “Benzinga”.

Suggested Citation

  • Elena Fedorova & Valentin Stepanov, 2023. "The impact of innovation news coverage on illiquid stocks: the case of US market," European Journal of Innovation Management, Emerald Group Publishing Limited, vol. 27(5), pages 1767-1792, January.
    • Handle: RePEc:eme:ejimpp:ejim-07-2022-0387
    DOI: 10.1108/EJIM-07-2022-0387
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