insider’s violations as trading ‘on’ or ‘on the basis of’ material nonpublic information,
it has not addressed the use/possession issue.’’Therefore, when it comes to material information, the SEC’’s view is that of a standard
closer to the ‘‘knowing possession’’ standard than to the ‘‘use’’ standard.
4.6.2 Unregulated news
Seeing how much attention the US regulatory agencies, such as the SEC, have paid to
the way ‘‘material information’’ about publicly traded companies should be handled,
one could not help but wonder how can any other type of news that is not coming
straight from the business move the stock price?
The answer may come from the fact that the news media appear to enjoy different
rules. To be sure, there are rules that apply to the news media, but by and large free
speech governs. For that reason I call the news coming from the news media—in regards
to publicly trading businesses in the US—unregulated.
Granted, blatantly telling or writing untruths about anyone, including corporations,
is not legal in the US. However, writing an opinion piece that has a negative view on a
company’s stock seems to be falling under the freedom-of-speech umbrella.
More interestingly, writing a research report about a company’s stock has been
viewed not only as legal but also as proprietary information. Wall Street analysts make
a nice business out of writing research reports and issuing earnings estimates and
opinions frequently.
In a recent case, a judge ruled in favor of ‘‘big banks’’ and against a news-reporting
company, Theflyonthewall.com. The judge issued a permanent injunction demanding
that Theflyonthewall.com delay the release of news on big banks’ analysts’ stock
upgrades and downgrades.
This case seems to encourage putting at a disadvantage a class of investors and the
general public while another class of investors are able to access material information
about publicly traded companies ahead of time—in direct contradiction with the SEC
requirements with regards to disclosure of ‘‘material information’’ about public
businesses trading on US exchanges.
To be of any value, a research report would have to contain material non-public
information. If that is true, based on the SEC regulation FD, the analysts could be
deemed to be in ‘‘knowing possession’’ of material non-public information—therefore,
liable under regulation FD. Apparently, this is a loophole in the process. Hence, I name
this ‘‘unregulated news’’.
Things get even more chaotic when unregulated news is found on blogs, social media,
and even in the news reporting of traditional media.
4.7 The news component of the stock price
The value of a company’s stock is related directly or indirectly to the future earnings of
the business. To be able to estimate the future earnings of a particular business, one
would need to forecast either the growth or slowdown potential for the business and be
able to quantify that. If the forecast indicates growth, then the stock price is likely to
Measuring the value of media sentiment: A pragmatic view 113