Social networks and market reactions to earnings news
| Authors | Hirshleifer, Peng, Wang |
| Year | 2021 |
| Type | Working Paper |
| Abstract | Using social network data from Facebook, we show that earnings announcements made by firms located in counties with higher investor social network centrality attract more attention from both retail and institutional investors. For such firms, the immediate price and volume reactions to earnings announcements are stronger, and post-announcement drift is weaker. Such firms have lower post-announcement persistence of return volatility but higher persistence in investor attention and trading volume. These effects are stronger for small firms, firms with poor analyst and media coverage, and for stocks with salient returns. Our evidence suggests a dual role of social networks-they facilitate the incorporation of public information into prices, but also trigger persistent excessive trading. |
| Keywords | Social networks, investor attention, earnings announcement, information diffusion, disagreement |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3824022 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) | Media and Textual Analysis | Propagation of Noise / Undesirable Outcomes | Social Network Structure |
The rise of Reddit: how social media affects retail investors and short-sellersâ roles in price discovery
| Authors | Hu, Jones, Zhang, Zhang |
| Year | 2021 |
| Type | Working Paper |
| Abstract | Using 2020-2021 data from social media platform Reddit, we examine connections among stock prices, retail trading, short-selling and social media activity. Higher Reddit traffic, more positive tone, and higher Reddit connectedness predict higher returns, greater and more positive retail order flow, and lower shorting flows the next day. Social media information content is distinct from retail order and shorting information content. Higher Reddit traffic, more positive tone, more disagreement and higher Reddit connectedness increase shorting flowâs information content. Robinhood 50 stocks are more affected by social media activity, with stronger links among retail order flow, shorting flows and future returns. |
| Keywords | social media, short selling, intraday trading, retail investors |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3807655&dgcid=ejournal_htmlemail_behavioral:experimental:finance:(editor%27s:choice):ejournal_abstractlink |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Media and Textual Analysis | Social Network Structure |
The rise of Reddit: How social media affects retail investors and short-sellers' roles in price discovery
| Authors | Hu, Jones, Zhang, Zhang |
| Year | 2021 |
| Type | Working Paper |
| Abstract | Using 2020-2021 data from social media platform Reddit, we examine connections among stock prices, retail trading, short-selling and social media activity. Higher Reddit traffic, more positive tone, and higher Reddit connectedness predict higher returns, greater and more positive retail order flow, and lower shorting flows the next day. Social media information content is distinct from retail order and shorting information content. Higher Reddit traffic, more positive tone, more disagreement and higher Reddit connectedness increase shorting flow's information content. Robinhood 50 stocks are more affected by social media activity, with stronger links among retail order flow, shorting flows and future returns. |
| Keywords | Social media, short selling, intraday trading, retail investors |
| URL | https://ssrn.com/abstract=3807655 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Media and Textual Analysis |
The rate of communication
| Authors | Huang, Hwang, Lou |
| Journal | Journal of Financial Economics |
| Year | 2021 |
| Type | Published Paper |
| Abstract | We study the transmission of financial news and opinions through social interactions among retail investors in the United States. We identify a series of plausibly exogenous shocks, which cause "treated investors" to trade abnormally. We then trace the "contagion" of abnormal trading activity from the treated investors to their neighbors and their neighbors' neighbors. Coupled with methodology drawn from epidemiology, our setting allows us to estimate the rate of communication and how it varies with the characteristics of the underlying investor population. |
| Keywords | Social interaction, investor communication, information diffusion |
| URL | https://www.sciencedirect.com/science/article/abs/pii/S0304405X21001276?via%3Dihub |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) |
The salience of entrepreneurship: evidence from online business
| Authors | Huang, Lin, Liu, Manso |
| Year | 2021 |
| Type | Working Paper |
| Abstract | We study the psychological bias underlying the decision to become an entrepreneur in the online business context. Using entrepreneurs affiliated with Taobao Marketplace, the worldâs largest online shopping platform, as our sample, we find that people who observe the emergence of successful stores in their neighborhood are more likely to become online entrepreneurs. Relying on the Taobao store rating system and detailed geographical information for identification, we find that in rural areas of China, an increase in the online rating (upgrade event) of a store leads to a significant increase in the number of new stores within a 0.5-km radius. This effect increases with the magnitude of the upgrade event, decreases with physical distance from the focal store and is robust to a wide range of rigorous model specifications. However, such decisions to enter the market may be suboptimal, as entrants whose entrepreneurs are motivated by these upgrade events underperform relative to their peers in terms of sales and have a higher probability of market exit. Overall, our results are most consistent with salience theories of choice and cannot be explained by regional development or rational learning. |
| Keywords | entrepreneurship, peer effect, salience theory, availability heuristic |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3843524 |
| Tags | Archival Empirical | Consumer Decisions | Manager / Firm Behavior |
The salience of entrepreneurship: Evidence from online business
| Authors | Huang, Lin, Liu, Manso |
| Year | 2021 |
| Type | Working Paper |
| Abstract | We study the psychological bias underlying the decision to become an entrepreneur in the online business context. Using entrepreneurs affiliated with Taobao Marketplace, the worldâÂÂs largest online shopping platform, as our sample, we find that people who observe the emergence of successful stores in their neighborhood are more likely to become online entrepreneurs. Relying on the Taobao store rating system and detailed geographical information for identification, we find that in rural areas of China, an increase in the online rating (upgrade event) of a store leads to a significant increase in the number of new stores within a 0.5-km radius. This effect increases with the magnitude of the upgrade event, decreases with physical distance from the focal store and is robust to a wide range of rigorous model specifications. However, such decisions to enter the market may be suboptimal, as entrants whose entrepreneurs are motivated by these upgrade events underperform relative to their peers in terms of sales and have a higher probability of market exit. Overall, our results are most consistent with salience theories of choice and cannot be explained by regional development or rational learning. |
| Keywords | Entrepreneurship, peer effect, salience theory, availability heuristic |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3843524 |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical | Propagation of Noise / Undesirable Outcomes | Social Network Structure |
The impact of restricting labor mobility on corporate investment and entrepreneurship
| Authors | Jeffers |
| Year | 2021 |
| Type | Working Paper |
| Abstract | This paper examines how labor frictions affect investment rate and new firm entry. Using matched employee-employer data from LinkedIn, I first show that increases in the enforceability of non-compete agreements lead to widespread declines in employee departures across seniority levels, driven by workers in knowledge-intensive occupations. Investment rates at existing firms increase, especially for firms that employ more skilled workers. This comes at the expense of new firm entry, which declines substantially in knowledge-intensive sectors. The results suggest that labor frictions play an important role in investment decisions, and that NCs may factor into slowing business dynamism. |
| Keywords | Labor mobility, entrepreneurship, investment, non-competes, human capital |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3040393 |
| Tags | Archival Empirical | Investment Decisions (Institutional) | Manager / Firm Behavior | Media and Textual Analysis |
Partisan professionals: Evidence from credit rating analysts
| Authors | Kempf, Tsoutsoura |
| Journal | Journal of Finance |
| Year | 2021 |
| Type | Published Paper |
| Abstract | Partisan perception affects the actions of professionals in the financial sector. Linking credit rating analysts to party affiliations from voter records, we show that analysts not affiliated with the U.S. president's party downward-adjust corporate credit ratings more frequently. Since we compare analysts with different party affiliations covering the same firm in the same quarter, differences in firm fundamentals cannot explain the results. We also find a sharp divergence in the rating actions of Democratic and Republican analysts around the 2016 presidential election. Our results show that analysts' partisan perception has price effects and may influence firms' investment policies. |
| Keywords | Analysts, credit ratings, partisanship, polarization, belief disagreement, Trump, elections |
| URL | https://doi.org/10.1111/jofi.13083 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Experimental / Survey-Based Empirical |
Friends with bankruptcy protection benefits
| Authors | Kleiner, Stoffman, Yonker |
| Journal | Journal of Financial Economics |
| Year | 2021 |
| Type | Published Paper |
| Abstract | We show information spillovers limit the effectiveness of targeted debt relief programs. We study individuals who learn about the likelihood of debt relief from the recent experiences of workplace peers filing for bankruptcy protection. Peers granted bankruptcy can discharge debts, while peers facing dismissal lose all protections. Exploiting the random assignment of judges to bankruptcy cases, we determine that individuals with a "dismissed peer" are significantly less likely to file for bankruptcy or enter foreclosure. We highlight a novel channel relating social networks to household finances and identify additional costs of granting individual debt relief imposed on lenders. |
| Keywords | Debt relief, personal bankruptcy, foreclosure, peer effects, social networks, bankruptcy juadges, random assignment |
| URL | https://doi.org/10.1016/j.jfineco.2020.08.003 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) |
Social proximity to capital: Implications for investors and firms
| Authors | Kuchler, Li, Peng, Stroebel, Zhou |
| Journal | Review of Financial Studies |
| Year | 2021 |
| Type | Published Paper |
| Abstract | We show that institutional investors are more likely to invest in firms from regions to which they have stronger social ties but find no evidence that these investments earn a differential return. Firms in regions with stronger social ties to locations with many institutional investors have higher valuations and liquidity. These effects are largest for small firms with little analyst coverage, suggesting that the investors' behavior is explained by their increased awareness of firms in socially proximate locations. Our results highlight that the social structure of regions affects firms' access to capital and contributes to geographic differences in economic outcomes. |
| Keywords | Social networks, Social Connectedness Index, institutional investors |
| URL | https://doi.org/10.1093/rfs/hhab111 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Investment Decisions (Institutional) | Social Network Structure |
Social finance
| Authors | Kuchler, Stroebel |
| Journal | Annual Review of Financial Economics |
| Year | 2021 |
| Type | Published Paper | Literature Review Paper |
| Abstract | We review an empirical literature that studies the role of social interactions in driving economic and financial decision-making. We first summarize recent work that documents an important role of social interactions in explaining household decisions in housing and mortgage markets. This evidence shows, for example, that there are large peer effects in mortgage refinancing decisions and that individuals's beliefs about the attractiveness of housing market investments are affected by the recent house price experiences of their friends. We also summarize recent work showing that social interactions affect the stock market investments of both retail and professional investors as well as household financial decisions such as retirement savings, borrowing, and default. Along the way, we describe a number of easily accessible recent data sets for the study of social interactions in finance, including the Social Connectedness Index, which measures the frequency of Facebook friendship links across geographies. We conclude by outlining several promising directions for further research in the field of social finance. |
| Keywords | Social networks, peer effects, financial decision-making, social dynamics, belief contagion |
| URL | https://doi.org/10.1146/annurev-financial-101320-062446 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) |
The trading response of individual investors to local bankruptcies
| Authors | Laudenbach, Loos, Pirschel, Wohlfart |
| Journal | Journal of Financial Economics |
| Year | 2021 |
| Type | Published Paper |
| Abstract | We examine how adverse local experiences that are uninformative of future returns affect households' investment behavior in the short term. Using data from a German online brokerage and a survey we show that retail investors sharply reduce risk taking in response to nearby firm bankruptcies. Adjustments in risk taking occur through immediate and transitory increases in trading, and seem to work through more pessimistic expectations about aggregate stock returns and increased risk aversion. Changes in background risks or wealth effects cannot explain our findings. Extrapolation from local experiences to aggregate expectations is inconsistent with optimal use of full or limited information. |
| Keywords | Individual investors, risk-taking, trading, experiences |
| URL | https://doi.org/10.1016/j.jfineco.2021.06.033 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) |
Does common ownership really increase firm coordination?
| Authors | Lewellen, Lowry |
| Journal | Journal of Financial Economics |
| Year | 2021 |
| Type | Published Paper |
| Abstract | A growing number of studies suggest that common ownership caused cooperation among firms to increase and competition to decrease. We take a closer look at four approaches used to identify these effects. We find that the effects that some studies have attributed to common ownership are caused by other factors, such as differential responses of firms (or industries) to the 2008 financial crisis. We propose a modification to one of the previously used empirical approaches that is less sensitive to these issues. Using this to re-evaluate the link between common ownership and firm outcomes, we find little robust evidence that common ownership affects firm behavior. |
| Keywords | Common ownership, institutional ownership, corporate governance |
| URL | https://www.sciencedirect.com/science/article/pii/S0304405X21000982 |
| Tags | Archival Empirical | Manager / Firm Behavior |
CEO social media presence and insider trading
| Authors | Li, Liang, Tang |
| Year | 2021 |
| Type | Working Paper |
| Abstract | Prior research finds that online social media usage may lower self-control and encourage indulgent behavior in laboratory subjects. We find that corporate CEOs show similar tendencies: CEOs with online social media presence are more likely to succumb to lower self-control and abuse their information advantage to profit from unethical insider trades. Specifically, CEOs' social media presence strongly predicts their insider trading activity in terms of incidence, intensity (amount and frequency), and profitability. We further find that the effect is driven by insider buys (not by sells) and is more pronounced for opportunistic buys which tend to contain more material non-public information. |
| Keywords | Insider trading, social media, CEO misconduct, business ethics |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3909886&dgcid=ejournal_htmlemail_behavioral:experimental:finance:(editor%27s:choice):ejournal_abstractlink |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Manager / Firm Behavior | Propagation of Noise / Undesirable Outcomes | Social Network Structure |
CEO social media presence and insider trading
| Authors | Li, Liang,Tang |
| Year | 2021 |
| Type | Working Paper |
| Abstract | Prior research finds that online social media usage may lower self-control and encourage indulgent behavior in laboratory subjects. We find that corporate CEOs show similar tendencies: CEOs with online social media presence are more likely to succumb to lower self-control and abuse their information advantage to profit from unethical insider trades. Specifically, CEOs' social media presence strongly predicts their insider trading activity in terms of incidence, intensity (amount and frequency), and profitability. We further find that the effect is driven by insider buys (not by sells) and is more pronounced for opportunistic buys which tend to contain more material non-public information. |
| Keywords | insider trading, social media, CEO misconduct, business ethics |
| URL | https://ssrn.com/abstract=3909886 |
| Tags | Archival Empirical | Manager / Firm Behavior | Media and Textual Analysis |
The politics of management earnings expectations
| Authors | Liu, Na, Nagar, Yan |
| Year | 2021 |
| Type | Working Paper |
| Abstract | This study documents that CEOsâ expectations about firm performance are more negatively biased in periods when the White House is governed by the political party that the CEOs did not contribute to, relative to periods when the White House is occupied by the CEOsâ party. This negative bias holds as strongly toward the end of the year, suggesting that CEOs do not revise their priors in response to new information. The results are stronger for firms whose performance is more correlated with the general economic conditions, consistent with managersâ biased beliefs about the economy driving the results. Upon facing an opposing presidency, the sensitivity of CEOsâ capital investments to cash flow decreases, relative to their politically aligned years. By contrast, actual firm performance is largely unaffected. Overall, our results highlight the importance of political partisan bias in shaping managersâ expectations about firm performance. |
| Keywords | Managerial Biases, Partisan Conflict, Earnings Expectations, CEO Earnings Forecasts |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3950975&dgcid=ejournal_htmlemail_capital:markets:market:efficiency:ejournal_abstractlink |
| Tags | Archival Empirical | Manager / Firm Behavior |
Superstition and farmers' life insurance spending
| Authors | Liu, Zhang, Chen, Yang |
| Journal | Economics Letters |
| Year | 2021 |
| Type | Published Paper |
| Abstract | Superstition is prevalent in rural areas, yet very few studies examine whether it affects rural households' economic decisions. In this paper, we investigate the impact of "zodiac year" superstition on Chinese rural households' life insurance spending. We find a statistically significant 18.5% increase in life insurance expenditure during the head's zodiac year. Such a boost is only significant in the zodiac year and does not exist in non-zodiac years. Our study provides novel evidence that rural households would hedge "bad luck" by self-insurance when bearing superstitious beliefs. |
| Keywords | Superstition, insurance, rural household |
| URL | https://doi.org/10.1016/j.econlet.2021.109975 |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) |
Economic narratives and market outcomes: A semi-supervised topic modeling approach
| Authors | Mai, Pukthuanthong |
| Year | 2021 |
| Type | Working Paper |
| Abstract | We employ sLDA to extract the narratives discussed by Shiller (2019) from 7 million NYT articles over 150 years. The estimation addresses look-ahead bias and changes in semantics. Panic and the narrative index positively predict market return and negatively predict volatility. Panic presents time-varying risk aversion. The narrative predictability increases recently at both market and portfolio and monthly and daily intervals. The narrative index constructed from 2 million WSJ articles over 130 years retains its predictive power, but Stock Bubble emerges as a negative market predictor. Media customizes their narratives to their readers, having a diverse effect on the market. |
| Keywords | Narratives, LDA, topic modeling, predictability, textual analysis, history |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3990324 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Media and Textual Analysis |
Folklore
| Authors | Michalopoulos, Xue |
| Year | 2021 |
| Type | Working Paper |
| Abstract | Folklore is the collection of traditional beliefs, customs, and stories of a community passed through the generations by word of mouth. We introduce to economics a unique catalogue of oral traditions spanning approximately 1,000 societies. After validating the catalogue's content by showing that the groups' motifs reflect known geographic and social attributes, we present two sets of applications. First, we illustrate how to fill in the gaps and expand upon a group's ethnographic record, focusing on political complexity, high gods, and trade. Second, we discuss how machine learning and human-classification methods can help shed light on cultural traits, using gender roles, attitudes towards risk, and trust as examples. Societies with tales portraying men as dominant and women as submissive tend to relegate their women to subordinate positions in their communities, both historically and today. More risk-averse and less entrepreneurial people grew up listening to stories where competitions and challenges are more likely to be harmful than beneficial. Communities with low tolerance towards antisocial behavior, captured by the prevalence of tricksters getting punished, are more trusting and prosperous today. These patterns hold across groups, countries, and second- generation immigrants. Overall, the results highlight the significance of folklore in cultural economics, calling for additional applications. |
| URL | https://www.nber.org/system/files/working_papers/w25430/w25430.pdf |
| Tags | Archival Empirical |
Folklore
| Authors | Michalopoulos, Xue |
| Year | 2021 |
| Type | Working Paper |
| Abstract | Folklore is the collection of traditional beliefs, customs, and stories of a community passed through the generations by word of mouth. We introduce to economics a unique catalogue of oral traditions spanning approximately 1,000 societies. After validating the catalogueâs content by showing that the groupsâ motifs reflect known geographic and social attributes, we present two sets of applications. First, we illustrate how to fill in the gaps and expand upon a groupâs ethnographic record, focusing on political complexity, high gods, and trade. Second, we discuss how machine learning and human-classification methods can help shed light on cultural traits, using gender roles, attitudes towards risk, and trust as examples. Societies with tales portraying men as dominant and women as submissive tend to relegate their women to subordinate positions in their communities, both historically and today. More risk-averse and less entrepreneurial people grew up listening to stories where competitions and challenges are more likely to be harmful than beneficial. Communities with low tolerance towards antisocial behavior, captured by the prevalence of tricksters getting punished, are more trusting and prosperous today. These patterns hold across groups, countries, and second- generation immigrants. Overall, the results highlight the significance of folklore in cultural economics, calling for additional applications. |
| Keywords | cultural economics, narratives, historical attitudes, economic decision, social norms |
| URL | https://www.nber.org/system/files/working_papers/w25430/w25430.pdf |
| Tags | Archival Empirical | Evolutionary Finance |