The media effect is a financial theory that evaluates how coverage of a topic by the news media influences investors, borrowers, and consumers. It applies to the mortgage industry and stock market activity, and measures the effect of major news stories on spending, refinancing, and investing. Often called behavioral finance, the theory appears to apply internationally and includes the social media effect.
One of the most visible trends in media effect occurs in the mortgage industry. When major news outlets report on declining interest rates, it typically generates a wave of property owners refinancing their loans. The coverage also increases the prepayment rate of borrowers when prominent stories appear about interest rates.
Financial markets may also be influenced by the media effect. It is based on the premise that individual investors are influenced by information they receive, whether the information is justified or rational or not. This might explain abnormal changes in stock market prices that cannot be rationalized through historical performance or analytical theories.
Studies have shown the volume of trading commonly spikes after media reports on a particular industry or corporation reach investors. This might influence the price of shares in a certain area by sparking excess buying or selling. Stock market activity in a particular sector linked to news stories may occur regardless of the actual value of the stock.
The headline effect represents another theory related to media effect, and is based on negative news articles. If a company or certain segment of the economy receives negative press coverage, it might affect the way consumers spend and how willing they are to invest. An example of this phenomenon centers on stories about minor hikes in gas prices. Studies show these news articles may compel consumers to reduce spending in other areas.
Social media effect analyzes how news spread via the Internet impacts stock prices and trading activity. One study looked at social media sites and blogs to measure the number of times a certain celebrity head of a large corporation was mentioned after he announced an illness. The analysis found a correlation between the social media effect and changes in corporate stock prices.
Media effect and its influence on financial behavior appear to apply internationally. The University of Hong Kong conducted a study in 2009 that revealed when people’s attitudes change, it leads to behavioral changes in financial affairs. By polling 300 investors, the study discovered a connection between investor behavior and media reports to which the study participants had been exposed.