Media Coverage and the Cross-Section of Stock Returns in Indonesia

This research evaluates if the media coverage from newspaper affect Indonesia’s securities markets in the way that the more coverage a stock get, the lower the return will be and the less coverage, or even no coverage a stock get, the higher the return will be. If it is found, then the causes behind the media effect are going to be analyzed and chosen from three different causes, which are return and reversal drift, impediment to trade hypothesis, or Merton’s investor recognition hypothesis.The research data consists of monthly return of long-short portfolio of all stocks in Indonesia’s stock market that did not cease and is not newly listed from January 2006 to December 2010, which is formed by going long (buying) no-coverage stocks and going short (selling) high-coverage stocks. The first test which is conducted is diagnostic test (normality, heteroskedasticity, auto-correlation, and multicollinearity test) to the variables to ensure that the equations in this research have BLUE estimator. Then, the ordinary least square regression is applied to the capital asset pricing model, Fama-French three factor model, and Carhart four-factor model to see whether the media effect exists.This research found that the media effect does not exist because what is found is that return of high-coverage stocks is higher than return of no-coverage stocks in Indonesia’s stock market.