Stock Prices, News, and Business Conditions
Grant McQueen, V. Vance Roley
NBER Working Paper No. 3520
Previous research finds that fundamental macroeconomic news has little effect on stock prices. This study shows that after allowing for different stages of the business cycle, a stronger relationship between stock prices and news is evident. In particular, the empirical results suggest that the effect of news about real economic activity depends on the varying responses of expected cash flows relative to equity discount rates. When the economy is strong, for example, the stock market responds negatively to good news about real economic activity, reflecting the larger effect on discount rates relative to expected cash flows.
Published: Review of Financial Studies, Vol. 6, no. 3 (1993): 683-707.