Settling scores with financial markets

Do financial markets properly price new information? This question has taken on renewed relevance since the outburst of the financial crisis. Soccer clubs listed on the London Stock Exchange provide a unique way of testing stock price reactions to different types of news, as showed by TILEC member Luc Renneboog and co-authors Frédéric Palomino (ENSAE) and Chendi Zhang (Warwick) in a recent discussion paper. For each firm, two pieces of information are released on a weekly basis: experts' expectations about game outcomes through the betting odds, and the game outcomes themselves. The stock market reacts strongly to news about game results, generating significant abnormal returns and trading volumes. There is evidence that the abnormal returns for the winning teams do not reflect rational expectations but are high due to overreactions induced by investor sentiment. This is not the case for losing teams. In contrast, there is no market reaction to the release of new betting information although these betting odds are excellent predictors of the game outcomes. The reasons for this discrepancy are thoroughly investigated by the authors. The paper is forthcoming in the Journal of Corporate Finance.