The Research Of Media Attention And The P/E Ratio From The Perspective Of Behavioral Finance: Theory And Empirical

Based on traditional financial theory, many of the present researches on price-earningsratio (PE ratio) are founded on the Efficient-Market Hypothesis (EMH) and use Gordon fixeddividend growth model as a starting point to derive the influence factor of PE ratio. Theseresearches try to evaluate the firm’s characteristic factors from an objective perspective withthe focus on the influence of corporate performance in determining PE ratio, and lack inquiryand study from a subjective perspective, which adopts behavioral financial theory.Using the number of resulted news from the Baidu search engine as the proxy variable ofmedia attention on the firm, this paper innovatively studies the correlation between mediaattention and PE ratio from a subjective perspective. On the basis of four premises, this paperconstructs an effective method to solve the simultaneous deviation between media coverageand PE ratio of listed firms by introducing additive form and multiplicative form into thetreatment of data and controlling the variables one by one. Thereon a cross-sectional datamodel based on market condition changes and a coefficient panel data model based onindustry difference are constructed to validate the previous four premises through stability testand self-related inspection. The conclusions are as follows:First, media attention on individual stock is positively related to PE ratio of thecorresponding firm. In other words, with other conditions unchanged, the more attention paidon the stock, the higher PE ratio it has; Such positive correlations grows more significantlywhen taking corporate scale, performance and risk into consideration, which proves theexistence of “media effect”.Second, the influence of media attention on PE ratio varies with different marketconditions. With other variables controlled, the bull market and bear market play a strongerrole in explaining the PE ratio levels, proving the existence of “market condition effect”.Third, media attention allocation on stocks is asymmetry in scale, which meansinproportional media attention is paid on large scale stocks and small ones, with the latterreceiving more media attention and being more vulnerable to speculation of investors andmarket makers. This proves the existence of “scale effect” in Chinese stock market.Finally, industry analysis reveals that there are significant differences of the influence of media attention on PE ratio between industries, i.e.“industry effect”. Specifically, among the12industries analyzed in this paper, IT industry exerts the greatest influence of mediaattention on PE ratio, followed by communication&culture industry, and social serviceindustry ranks the least. There are relatively less differences in the intensity of the influence ofmedia attention among manufacturing, wholesale and retail trade industry, integrated industry,agriculture, forestry, animal husbandry, fisheries and electric power, gas and water production.This paper also finds that between2003and2010, IT industry and communication&cultureindustry rank foremost in media coverage while social service industry generally captureslittle media attention, which indicates that attention-driven buying behavior varies accordingto investors’ familiarity of industries.