Can social media distort price discovery? Evidence from merger rumors
| Authors | Jia, Redigolo, Shu, Zhao |
| Journal | Journal of Accounting and Economics |
| Year | 2020 |
| Type | Published Paper |
| Abstract | We study whether social media can play a negative information role by impeding price discovery in the presence of highly speculative rumors. We focus on merger rumors, where most do not materialize. We find that merger rumors accompanied by greater Twitter activity elicit greater immediate market reaction even though rumor-related Twitter activity is unrelated to the probability of merger realization. The price distortion associated with tweet volume persists weeks after a rumor and reverses only after eight weeks. The price distortion is more pronounced for rumors tweeted by Twitter users with greater social influence, for target firms with low institutional ownership, and for rumors that supply more details. Our evidence suggests that social media can be a rumor mill that hinders the market's price discovery of potentially false information. |
| Keywords | Social media, Twitter, merger and acquisition, rumor, merger rumor, persuasion bias |
| URL | https://econpapers.repec.org/article/eeejaecon/v_3a70_3ay_3a2020_3ai_3a1_3as0165410120300367.htm |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Propagation of Noise / Undesirable Outcomes |
Biased information transmission in investor social networks: Evidence from professional traders
| Authors | Lim, Lane, Uzzi |
| Journal | Academy of Management Annual Meeting Proceedings |
| Year | 2020 |
| Type | Published Paper |
| Abstract | This research examines how the positive or negative valence of proprietary information affects both the likelihood that people diffuse this information through their social networks and the likelihood that recipients' access to this information provides them with a source of comparative advantage. Using a unique dataset of over 2 million stock trades and associated profits and losses, and 1 million instant messages exchanged between professional day traders at a U.S. hedge fund, we show that day traders are more likely to talk about their gains than their losses with their close contacts, suggesting that positive information is more likely to be shared among one's close network of strong ties. However, by examining the subsequent behaviors of message recipients, we find that recipients tend to discount the value of positive, gains related information, being both more likely to pass on and profit from negative information related to trading losses, particularly from their strong ties. Our results suggest that although individuals are more likely to share positive information with their contacts, message recipients appear to account for the asymmetry in their subsequent communications and decision-making. |
| URL | https://journals.aom.org/doi/10.5465/AMBPP.2020.18198abstract |
| Tags | Archival Empirical | Investment Decisions (Institutional) | Social Transmission Biases |
Investing in low-trust countries: On the role of social trust in the global mutual fund industry
| Authors | Massa, Wang, Zhang, Zhang |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2020 |
| Type | Published Paper |
| Abstract | We hypothesize that social trust, in mitigating contracting incompleteness, may have an important effect on the activeness and effectiveness of delegated portfolio management. Using a complete sample of worldwide open-end mutual funds, we find that trust is positively associated with the activeness of funds and that trust-related active share delivers superior performance (e.g., approximately 2% per year for cross-border investments). Moreover, "trust in the market" and "trust in managers" play important yet different roles for different types of cross-border delegated portfolio management. Our results suggest that trust acts as a fundamental building block for delegated portfolio management. |
| Keywords | Social trust, portfolio management, mutual fund, contracting relationship |
| URL | https://doi.org/10.1017/S0022109020000848 |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical | Investment Decisions (Institutional) |
Foreign-born resident networks and stock comovement: When local bias meets home (country) bias
| Authors | Meng, Pantzalis |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2020 |
| Type | Published Paper |
| Abstract | Foreign migration flows have important stock market consequences. Foreign-born resident networks within U.S. Metropolitan Statistical Areas (MSAs) are associated with excess return comovement between locally headquartered stocks and American Depositary Receipts (ADRs) from countries with ties to the MSA through the network of foreign-born residents. This comovement is hardly due to correlated fundamentals and at least partially driven by correlated trading within members of a common investor base consisting of foreign-born residents. Our evidence has implications for both investors and foreign multinational corporations (MNCs) seeking to reap benefits from cross-listings and is consistent with the notion that foreign-born residents exhibit both local bias and home (country) bias. |
| Keywords | Foreign migration, social networks, stock price behavior, international diversification |
| URL | https://doi.org/10.1017/S0022109020000976 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Social Network Structure |
Using gossips to spread information: Theory and evidence from two randomized controlled trials
| Authors | Banerjee, Chandrasekhar, Duflo, Jackson |
| Journal | Review of Economic Studies |
| Year | 2019 |
| Type | Published Paper |
| Abstract | Can we identify highly central individuals in a network without collecting network data, simply by asking community members? Can seeding information via such nominated individuals lead to significantly wider diffusion than via randomly chosen people, or even respected ones? In two separate large field experiments in India, we answer both questions in the affirmative. In particular, in 521 villages in Haryana, we provided information on monthly immunization camps to either randomly selected individuals (in some villages) or to individuals nominated by villagers as people who would be good at transmitting information (in other villages). We find that the number of children vaccinated every month is 22% higher in villages in which nominees received the information. We show that people's knowledge of who are highly central individuals and good seeds can be explained by a model in which community members simply track how often they hear gossip about others. Indeed, we find in a third data set that nominated seeds are central in a network sense, and are not just those with many friends or in powerful positions. |
| Keywords | Centrality, gossip, networks, diffusion, influence, social learning |
| URL | https://doi.org/10.1093/restud/rdz008 |
| Tags | Experimental / Survey-Based Empirical | Social Network Structure |
Social networks, reputation, and commitment: Evidence from a savings monitors experiment
| Authors | Breza, Chandrasekhar |
| Journal | Econometrica |
| Year | 2019 |
| Type | Published Paper |
| Abstract | We conduct an experiment to study whether individuals save more when information about the progress toward their self-set savings goal is shared with another village member (a "monitor"). We develop a reputational framework to explore how a monitor's effectiveness depends on her network position. Savers who care about whether others perceive them as responsible should save more with central monitors, who more widely disseminate information, and proximate monitors, who pass information to individuals with whom the saver interacts frequently. We randomly assign monitors to savers and find that monitors on average increase savings by 36%. Consistent with the framework, more central and proximate monitors lead to larger increases in savings. Moreover, information flows through the network, with 63% of monitors telling others about the saver's progress. Fifteen months after the conclusion of the experiment, other villagers have updated their beliefs about the saver's responsibility in response to the intervention. |
| Keywords | Commitment, reputation, savings, social networks. |
| URL | https://onlinelibrary.wiley.com/doi/abs/10.3982/ECTA13683 |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Social Network Structure |
The relevance of broker networks for information diffusion in the stock market
| Authors | Di Maggio, Franzoni, Kermani, Sommavilla |
| Journal | Journal of Financial Economics |
| Year | 2019 |
| Type | Published Paper |
| Abstract | This paper shows that the network of relationships between brokers and institutional investors shapes information diffusion in the stock market. Central brokers gather information by executing informed trades, which is then leaked to their best clients. After large informed trades, other institutional investors are significantly more likely to execute similar trades through the same broker, allowing them to capture returns that are twice as large as their normal trading performance. Also indicative of information leakage, the clients of the broker employed by activist investors to execute their trades buy the same stocks just before the filing of the 13D. |
| URL | https://www.sciencedirect.com/science/article/abs/pii/S0304405X1930087X |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Investment Decisions (Institutional) | Social Network Structure |
Foreclosure contagion and the neighborhood spillover effects of mortgage defaults
| Authors | Gupta |
| Journal | Journal of Finance |
| Year | 2019 |
| Type | Published Paper |
| Abstract | In this paper, I identify shocks to interest rates resulting from two administrative details in adjustable-rate mortgage contract terms: the choice of financial index and the choice of lookback period. I find that a 1 percentage point increase in interest rate at the time of adjustable-rate mortgage (ARM) reset results in a 2.5 percentage increase in the probability of foreclosure in the following year, and that each foreclosure filing leads to an additional 0.3 to 0.6 completed foreclosures within a 0.10-mile radius. In explaining this result, I emphasize price effects, bank-supply responses, and borrower responses arising from peer effects. |
| URL | https://doi.org/10.1111/jofi.12821 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) |
Information sharing and spillovers: Evidence from financial analysts
| Authors | Hwang, Liberti, Sturgess |
| Journal | Management Science |
| Year | 2019 |
| Type | Published Paper |
| Abstract | We study how information sharing within an organization affects individual performance. We look at situations in which the same analyst, while working at the same broker, covers multiple mergers and acquisitions (M&As), in particular the acquirer prior to the M&A and the merged firm thereafter. We find that earnings forecasts for the merged firm are significantly more accurate when the analyst has a colleague (working at the same broker) covering the target prior to the M&A. This holds particularly true if acquirer analysts and target analysts reside in the same locale, if they are part of a smaller team, and if the target analyst is of higher quality. Our findings highlight the importance of information spillovers on individual performance in knowledge-based industries. |
| URL | https://pubsonline.informs.org/doi/10.1287/mnsc.2017.2986 |
| Tags | Archival Empirical | Productivity Spillovers |
The self-presentational consequences of upholding one's stance in spite of the evidence
| Authors | John, Jeong, Gino, Huang |
| Journal | Organizational Behavior and Human Decision Processes |
| Year | 2019 |
| Type | Published Paper |
| Abstract | Five studies explore the self-presentational consequences of refusing to "back down" -- that is, upholding a stance despite evidence of its inaccuracy. Using data from an entrepreneurial pitch competition, Study 1 shows that entrepreneurs tend not to back down even though investors are more impressed by entrepreneurs who do. Next, in two sets of experiments, we unpack the psychology underlying why actors refuse to publicly back down and investigate observers' impressions of those actors. Specifically, we show that observers view people who refuse to back down as confident but unintelligent, and these perceptions drive consequential decisions about such refusers, such as whether to invest in their ideas (Studies 1 & 2) or whether to hire them (Study 3). Although actors can intuit these effects (Study 4), this understanding is not reflected in their behavior because they are concerned with saving face (Study 5). |
| Keywords | Self-presentation, belief perseverance, judgment, confidence, persuasion |
| URL | https://doi.org/10.1016/j.obhdp.2019.07.001 |
| Tags | Experimental / Survey-Based Empirical | Investment Decisions (Institutional) | Manager / Firm Behavior | Social Transmission Biases |
The relevance of broker networks for information diffusion in the stock market
| Authors | Maggio, Franzoni, Kermani, Sommavilla |
| Journal | Journal of Financial Economics |
| Year | 2019 |
| Type | Published Paper |
| Abstract | This paper shows that the network of relationships between brokers and institutional investors shapes information diffusion in the stock market. Central brokers gather information by executing informed trades, which is then leaked to their best clients. After large informed trades, other institutional investors are significantly more likely to execute similar trades through the same broker, allowing them to capture returns that are twice as large as their normal trading performance. Also indicative of information leakage, the clients of the broker employed by activist investors to execute their trades buy the same stocks just before the filing of the 13D. |
| Keywords | Brokers, institutional investors, social networks, informed trading, market efficiency |
| URL | https://doi.org/10.1016/j.jfineco.2019.04.002 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Investment Decisions (Institutional) | Social Network Structure |
Learning from coworkers: Peer effects on individual investment decisions
| Authors | Ouimet, Tate |
| Journal | Review of Financial Studies |
| Year | 2019 |
| Type | Published Paper |
| Abstract | Using unique data on employee stock purchase plans (ESPPs), we examine the influence of networks on investment decisions. Comparing employees within a firm during the same election window with metro area fixed effects, we find that the choices of coworkers in the firm's ESPP exert a significant influence on employees' own decisions to participate and trade. Moreover, we find that the presence of high-information employees magnifies the effects of peer networks. Given participation in an ESPP is value-maximizing, our analysis suggests the potential of networks and targeted investor education to improve financial decision-making. |
| URL | https://doi.org/10.1111/jofi.12830 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) |
How do investment ideas spread through social interaction? Evidence from a Ponzi scheme
| Authors | Rantala |
| Journal | Journal of Finance |
| Year | 2019 |
| Type | Published Paper |
| Abstract | A unique data set from a large Ponzi scheme allows me to study word-of-mouth diffusion of investment information. Investors could join the scheme only by invitation from an existing member, which allows me to observe how the idea spreads from one person to the next based on inviter-invitee relationships. I find that the observed social network has a scale-free connectivity structure, which significantly facilitates the diffusion of the investment idea and contributes to the growth and survival of the socially spreading Ponzi scheme. I further find that investors invest more if their inviter has comparatively higher age, education, and income. |
| URL | https://doi.org/10.1111/jofi.12822 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) | Propagation of Noise / Undesirable Outcomes | Social Network Structure |
Not close enough for comfort: Facebook users eschew high intimacy negative disclosures
| Authors | Saling, Cohen, Cooper |
| Journal | Personality and Individual Differences |
| Year | 2019 |
| Type | Published Paper |
| Abstract | Facebook is a ubiquitous platform for self-disclosure; however, norms associated with online and offline disclosure appear to differ. The present study investigated whether people's disposition to disclose and comfort with others' disclosures of negatively-valenced content differs online and offline. Additionally, psychological predictors of offline and online disclosure were explored. Results revealed that offline disclosure of negatively-valenced personal information is preferred to online disclosure and that comfort with others' disclosure of such information is greater offline than online. As information becomes more sensitive, the likelihood of sharing this information online decreases; similarly, the degree of comfort with others' online disclosure of such information decreases. Agreeableness was positively correlated with reactions to others' online posts. Agreeableness, openness, self-esteem and emotional stability were positively correlated with comfort with others' offline disclosures. Tendency to disclose online was higher for those with low emotional stability and low openness (but only for some scenarios). Age effects were most prominent with respect to the information shared and comfort with others' disclosures, but across age groups there was a preference for offline, rather than online, sharing. Collectively, the results reveal that individual differences are weaker predictors of online disclosure than the nature of information disclosed. |
| Keywords | Facebook, personality, self-esteem, self-disclosure, audience effects, age |
| URL | https://doi.org/10.1016/j.paid.2019.01.028 |
| Tags | Experimental / Survey-Based Empirical | Social Transmission Biases |
Intergenerational mobility and preferences for redistribution
| Authors | Alesina, Stantcheva, Teso |
| Journal | American Economic Review |
| Year | 2018 |
| Type | Published Paper |
| Abstract | Using new cross-country survey and experimental data, we investigate how beliefs about intergenerational mobility affect preferences for redistribution in France, Italy, Sweden, the United Kingdom, and the United States. Americans are more optimistic than Europeans about social mobility. Our randomized treatment shows pessimistic information about mobility and increases support for redistribution, mostly for "equality of opportunity" policies. We find strong political polarization. Left-wing respondents are more pessimistic about mobility: their preferences for redistribution are correlated with their mobility perceptions; and they support more redistribution after seeing pessimistic information. None of this is true for right-wing respondents, possibly because they see the government as a "problem" and not as the "solution". |
| Keywords | Social mobility, opportunity fairness, political process, heterogeneity in perceptions |
| URL | https://www.aeaweb.org/articles?id=10.1257/aer.20162015 |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical |
The economic effects of social networks: Evidence from the housing market
| Authors | Bailey, Cao, Kuchler, Stroebel |
| Journal | Journal of Political Economy |
| Year | 2018 |
| Type | Published Paper |
| Abstract | We show how data from online social networking services can help researchers better understand the effects of social interactions on economic decision making. We combine anonymized data from Facebook, the largest online social network, with housing transaction data and explore both the structure and the effects of social networks. Individuals whose geographically distant friends experienced larger recent house price increases are more likely to transition from renting to owning. They also buy larger houses and pay more for a given house. Survey data show that these relationships are driven by the effects of social interactions on individuals' housing market expectations. |
| URL | https://www.journals.uchicago.edu/doi/abs/10.1086/700073 |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) |
Can Twitter help predict firm-level earnings and stock returns?
| Authors | Bartov, Faurel, Mohanram |
| Journal | The Accounting Review |
| Year | 2018 |
| Type | Published Paper |
| Abstract | Prior research has examined how companies exploit Twitter in communicating with investors, and whether Twitter activity predicts the stock market as a whole. We test whether opinions of individuals tweeted just prior to a firm's earnings announcement predict its earnings and announcement returns. Using a broad sample from 2009 to 2012, we find that the aggregate opinion in individual tweets successfully predicts a firm's forthcoming quarterly earnings and announcement returns. These results hold for tweets that convey original information, as well as tweets that disseminate existing information, and are stronger for tweets providing information directly related to firm fundamentals and stock trading. Importantly, our results hold even after controlling for concurrent information or opinion from traditional media sources, and are stronger for firms in weaker information environments. Our findings highlight the importance of considering the aggregate opinion in individual tweets when assessing stocks' future prospects and value. |
| Keywords | Twitter, social media, wisdom of crowds, earnings, analyst earnings forecast, abnormal stock returns |
| URL | https://publications.aaahq.org/accounting-review/article-abstract/93/3/25/4062/Can-Twitter-Help-Predict-Firm-Level-Earnings-and?redirectedFrom=fulltext |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Manager / Firm Behavior | Media and Textual Analysis |
Status goods: Experimental evidence from platinum credit cards
| Authors | Bursztyn, Ferman, Fiorin, Kanz, Rao |
| Journal | Quarterly Journal of Economics |
| Year | 2018 |
| Type | Published Paper |
| Abstract | This article provides field-experimental evidence on status goods. We work with an Indonesian bank that markets platinum credit cards to high-income customers. In a first experiment, we show that demand for the platinum card exceeds demand for a nondescript control product with identical benefits, suggesting demand for the pure status aspect of the card. Transaction data reveal that platinum cards are more likely to be used in social contexts, implying social image motivations. In a second experiment, we provide evidence of positional externalities from the consumption of these status goods. A final experiment provides suggestive evidence that increasing self-esteem causally reduces demand for status goods,indicating that social image might be a substitute for self-image. |
| Keywords | Social status, consumer behavior, self-esteem, positional externalities |
| URL | https://doi.org/10.1093/qje/qjx048 |
| Tags | Consumer Decisions | Experimental / Survey-Based Empirical |
The effect of social density on word of mouth
| Authors | Consiglio, Angelis, Costabile |
| Journal | Journal of Consumer Research |
| Year | 2018 |
| Type | Published Paper |
| Abstract | This research investigates whether a contextual factor-social density, defined as the number of people in a given area-influences consumers' propensity to share information. We propose that high- (vs. low-) density settings make consumers experience a loss of perceived control, which in turn makes them more likely to engage in word of mouth to restore it. Six studies, conducted online as well as in laboratory and naturalistic settings, provide support for this hypothesis. We demonstrate that social density increases the likelihood of sharing information with others and that a person's chronic need for control moderates this effect. Consistent with the proposed process, the effect of social density on information sharing is attenuated when participants have the opportunity to restore control before they engage in word of mouth. We also provide evidence that sharing information restores perceived control in high-density environments, and we disentangle the effect of social density from that of physical proximity. |
| Keywords | Social density, compensatory control, word of mouth |
| URL | https://doi.org/10.1093/jcr/ucy009 |
| Tags | Consumer Decisions | Experimental / Survey-Based Empirical |
What motivates buy-side analysts to share recommendations online?
| Authors | Crawford, Gray, Johnson, Price |
| Journal | Management Science |
| Year | 2018 |
| Type | Published Paper |
| Abstract | We examine why buy-side analysts share investment ideas on SumZero.com, a private social networking website designed to facilitate interaction and information sharing among buy-side professionals. We first document that our sample of more than 1,000 buy-side analysts issue recommendations that have investment value. In particular, recommendations generate significant returns when they are posted to the website and the returns to both buy and sell recommendations drift in the direction of the recommendation. These returns are the most dramatic for contrarian recommendations (i.e., those issued contrary to the sell-side consensus). We explore labor-market motivations for sharing information and document that analysts who have strong incentives to seek new jobs (those at small funds), are significantly more likely to issue recommendations. We also show that analysts who share investment ideas are more likely to change jobs, and that the ratings their recommendations receive are positively related to changing employment. Overall, we show that social networking is an effective reputation building and job seeking tool for buy-side analysts. |
| Keywords | Security analysts, stock recommendations, hedge funds |
| URL | https://doi.org/10.1287/mnsc.2017.2749 |
| Tags | Archival Empirical | Investment Decisions (Institutional) | Social Network Structure |