What it is:
A headline effect is an adverse effect on a company'sprice brought on by media coverage.
How it works (Example):
For example, let's say that Company XYZ makes a line of sweets and snacks that are sweetened with the "Sweetums" sugar substitute. The sugar substitute keeps the calorie count down to just 15 per serving, which is revolutionary.
However, an activist groupa research study that finds a possible but not proven link between Sweetums and autism. This creates for Company XYZ. The more media attention the study gets, the fewer people be inclined to buy the company's products, causing the company to be worth less and the price to go down. This decrease in price is the result of the headline effect.
Why it Matters:
Headline effect is one reason companies invest in good public relations people. To mitigate thefor Company XYZ, for example, the company's PR department might point out to journalists that the research did not prove a link, that the research was funded by an activist group, and that the products help people become healthier by helping them lose weight.
For investors, headline effects can make aprice wobble, but the effects are often short-term in nature. However, it is important to that headlines can affect a price even if the news in those headlines doesn't hold water.