Information Salience and News Absorption by the Stock Market: The Peculiar Case of Betting Markets

Abstract

Soccer clubs listed on the London Stock Exchange provide a unique way of testing stock price reactions to different types of news. 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. Stock markets react strongly to news about game results, generating significant abnormal returns and trading volumes. Due to the absence of a market reaction to betting odds and the fact that these odds are excellent predictors of game outcomes, these odds contain unpriced information and can be used to predict short-run stock returns. A naïve trading rule based on the probability to win yields abnormal returns of more than 245 basis points over a three-month period. The findings reinforce theories suggesting that under-reaction to news is due to investors' limited processing ability which generates limited attention. In particular, some non-salient public information is totally ignored by investors.

Keywords: soccer clubs, stock price reaction, betting odds, game results

JEL Classification: G14, G12