On the Informativeness of Retail Investors: Are News Bad News?

Abstract

The topic of this thesis is examining the relationship between sentiment-laden financial news and short-term stock price reactions in the Danish equity market, with a particular focus on how retail investor behavior may influence market efficiency. Drawing on the foundations of the semi-strong form of the Efficient Market Hypothesis, as well as insights from behavioral finance, the thesis investigates whether abnormal returns can be observed following the release of news articles with positive or negative sentiment. To explore this, Bloomberg’s NLP-based sentiment scores are used alongside daily stock return data for Danish-listed companies from January 2015 to January 2025. An event study methodology is applied to isolate the market reaction in the days immediately surrounding sentiment-driven news releases. The analysis includes a comparison of cumulative abnormal returns across different sentiment types and evaluates the potential for delayed or exaggerated market responses. The findings suggest that while negative sentiment has a significant effect on short-term returns, there is no consistent evidence of post-event drift or price reversals. This indicates that although investor behavior reflects known psychological biases, such as loss aversion, the Danish stock market largely absorbs sentiment information efficiently. As such, the market cannot be said to be inefficient, but it also does not fully conform to the ideal of rational market participants as assumed under the Efficient Market Hypothesis.