Social influence in household equity investment: Evidence from randomized military drafts
| Authors | Chi, Hung, Lin, Tseng |
| Year | 2023 |
| Type | Working Paper |
| Abstract | We provide causal evidence of the peer effect on investment in a large-scale natural experiment. We show that retail investors respond to the investment decisions of their military peers who were randomly assigned in compulsory military drafts: retail investors participate more in the stock market, invest more in stocks that peers hold, and perform better. Our investigation indicates that retail investors learn valuable information from their peers to make profitable investment decisions. These effects are more pronounced among peers who are more sophisticated and among stocks entailing less behavioral bias. Stocks with more peer clientele outperform stocks with less clientele. |
| URL | https://sites.google.com/view/timcchung/research |
| Tags | Archival Empirical | Consumer Decisions | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) |
Finfluencers
| Authors | Kakhbod, Kazempour, Livdan, Schuerhoff |
| Year | 2023 |
| Type | Working Paper |
| Abstract | Tweet-level data from a social media platform reveals low average accuracy and high dispersion in the quality of advice by financial influencers, or "finfluencers": 28% of finfluencers are skilled, generating 2.6% monthly abnormal returns, 16% are unskilled, and 56% have negative skill ("antiskill") generating -2.3% monthly abnormal returns. Consistent with homophily shaping finfluencers' social networks, antiskilled finfluencers have more followers and more influence on retail trading than skilled finfluencers. The advice by antiskilled finfluencers creates overly optimistic beliefs most times and persistent swings in followers' beliefs. Consequently, finfluencers cause excessive trading and inefficient prices such that a contrarian strategy yields 1.2% monthly out-of-sample performance |
| Keywords | Finfluencers, social media, mixture modeling, retail traders, homophily, belief bias |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4428232 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Media and Textual Analysis | Propagation of Noise / Undesirable Outcomes |
Do managers' nonnative accents influence investment decisions?
| Authors | Barcellos, Kadous |
| Journal | The Accounting Review |
| Year | 2022 |
| Type | Published Paper |
| Abstract | Reactions to earnings calls are sensitive to subtle features of managers' speech, but little is known about the effect of nonnative accents in this setting. Nonnative-accented CEOs may avoid holding calls in English for fear of investors' negative stereotypes. However, theory indicates that stereotypes from the CEO position and nonnative accents conflict, and that the process of reconciling conflicting stereotypes requires effortful processing. We use a series of four experiments to test each link of the causal chain that we hypothesize based on this theory. We demonstrate that motivated investors reconcile conflicting stereotypes by inferring exceptional qualities, such as hard work and determination, that positively affect their impressions of nonnative-accented CEOs and, hence, of the company as an investment. We also show that, because bad news stimulates effortful processing, investors receiving bad (versus good) news are more likely to form a positive image of nonnative-accented CEOs and their companies. |
| Keywords | Earnings conference calls, investment decisions, nonnative accents, impressions of CEOs |
| URL | https://doi.org/10.2308/TAR-2020-0228 |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Manager / Firm Behavior |
Epidemiological expectations
| Authors | Carroll, Wang |
| Year | 2022 |
| Type | Working Paper | Literature Review Paper |
| Abstract | 'Epidemiological' models of belief formation put social interactions at their core; such models are widely used by scholars who are not economists to study the dynamics of beliefs in populations. We survey the literature in which economists attempting to model the consequences of beliefs about the future -'expectations'- have employed a full-fledged epidemiological approach to explore an economic question. We draw connections to related work on 'contagion,' narrative economics, news/rumor spreading, and the spread of internet memes. A main theme of the paper is that a number of independent developments have recently converged to make epidemiological expectations ('EE') modeling more feasible and appealing than in the past. |
| Keywords | Economic expectations, epidemiological expectations, social interactions, social dynamics, information diffusion, economic narratives |
| URL | https://www.nber.org/papers/w30605?utm_campaign=ntwh&utm_medium=email&utm_source=ntwg4 |
| Tags | Asset Pricing, Trading Volume and Market Efficiency | Consumer Decisions | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) | Manager / Firm Behavior | Media and Textual Analysis | Propagation of Noise / Undesirable Outcomes | Social Network Structure | Social Transmission Biases | Theory |
Listening in on investors' thoughts and conversations
| Authors | Chen, Hwang |
| Journal | Journal of Financial Economics |
| Year | 2022 |
| Type | Published Paper |
| Abstract | A large literature in neuroscience and social psychology shows that humans are wired to be meticulous about how they are perceived by others. In this paper, we propose that impression management considerations can also end up guiding the content that investors transmit via word of mouth and inadvertently lead to the propagation of noise. We analyze server log data from one of the largest investment-related websites in the United States. Consistent with our proposition, we find that investors more frequently share articles that are more suitable for impression management despite such articles less accurately predicting returns. Additional analyses suggest that high levels of sharing can lead to overpricing. |
| Keywords | Social interactions, social transmission bias, asset prices |
| URL | https://www.sciencedirect.com/science/article/abs/pii/S0304405X21003810?via%3Dihub |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Social Transmission Biases |
The ex ante likelihood of bubbles
| Authors | Chinco |
| Journal | Management Science |
| Year | 2022 |
| Type | Published Paper |
| Abstract | The limits of arbitrage explain how a speculative bubble is sustained; they do not explain how likely one is to occur. To do that, you need a theory about the thing that sporadically causes arbitrageur constraints to bind. I propose a first such theory, which is based on social interactions between speculators. The theory says that bubbles should be more likely in assets where increases in past returns make excited-speculators relatively more persuasive to their peers. I empirically verify this ex ante prediction about bubble likelihoods and show that it is robust to some ex post disagreement about bubble definitions. |
| Keywords | Limits to arbitrage, speculative bubbles, social interactions |
| URL | https://pubsonline.informs.org/doi/10.1287/mnsc.2022.4351 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) | Propagation of Noise / Undesirable Outcomes | Theory |
Echo chambers
| Authors | Cookson, Engelberg, Mullins |
| Journal | The Review of Financial Studies |
| Year | 2022 |
| Type | Published Paper |
| Abstract | We find evidence of selective exposure to confirmatory information among 400,000 users on the investor social network StockTwits. Self-described bulls are five times more likely to follow a user with a bullish view of the same stock than are self-described bears. Consequently, bulls see 62 more bullish messages and 24 fewer bearish messages than bears do over the same 50-day period. These âecho chambersâ exist even among professional investors and are strongest for investors who trade on their beliefs. Finally, beliefs formed in echo chambers are associated with lower ex post returns, more siloing of information, and more trading volume. |
| URL | https://academic.oup.com/rfs/article-abstract/36/2/450/6670640 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Propagation of Noise / Undesirable Outcomes | Social Network Structure | Social Transmission Biases |
Trust in crowdfunding: Experimental evidence from a fundraising campaign
| Authors | Diep-Nguyen, Yang |
| Year | 2022 |
| Type | Working Paper |
| Abstract | Despite the importance of trust in determining economic outcomes, little is known about what facilitates or hinders interpersonal trust. Using a randomized field experiment of a fundraising campaign, we examine the role of trust and the determinants of perceived trustworthiness in the context of crowdfunding. The key feature of the experiment involves randomized rotations of the campaign design, which differ in the profile photo, details of campaign description, and the update status. The perceived trustworthiness of these rotations is then independently judged by survey participants. We find that while posting updates significantly increases perceived trustworthiness of the campaign and the funds raised, having a more detailed description has little effect. Our follow-up survey reveals that the differential effects are mostly driven by information salience. Interestingly, displaying a white or male profile photo improves the trustworthiness score and generates a higher contribution level, which can be explained by white participants(and donors) and male participants (and donors) preferences. Finally, we find that effects of campaign updates and the profile photo disappear when donors are directly connected to the fundraising team, highlighting the authentication and trust-transmission role of social networks. |
| Keywords | Trust, trustworthiness, crowdfunding, donations |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3972418&dgcid=ejournal_htmlemail_behavioral:experimental:economics:ejournal_abstractlink |
| Tags | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Social Network Structure | Theory |
Should retail investors listen to social media analysts? Evidence from text-implied beliefs
| Authors | Dim |
| Year | 2022 |
| Type | Working Paper |
| Abstract | This paper uses machine learning to infer nonprofessional social media investment analysts' (SMAs) beliefs from their opinions on individual stocks. SMAs' average beliefs predict future abnormal returns and earnings surprises. However, there exists substantial heterogeneity in SMAs' ability to form beliefs that yield investment value. Some 13% high-skilled SMAs form beliefs that yield a sizeable one-week three-factor alpha of 61 bps, while the remaining 87% low-skilled SMAs generate only 6 bps. Firm and industry specializations are the most distinctive characteristics of high-skilled SMAs. When forming beliefs, SMAs extrapolate from past returns and herd on the consensus view of their peers. However, these seemingly behavioral biases do not result in systematically wrong beliefs. |
| Keywords | Nonprofessional analysts, belief formation, investor skill, market efficiency, herding, extrapolation, machine learning, natural language processing |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3813252 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Media and Textual Analysis | Social Network Structure |
The democratization of investment research and the informativeness of retail investor trading
| Authors | Farrell, Green, Jame, Markov |
| Journal | Journal of Financial Economics |
| Year | 2022 |
| Type | Published Paper |
| Abstract | We study the effects of social media on the informativeness of retail trading. Our identification strategy exploits the editorial delay between report submission and publication on Seeking Alpha, a popular crowdsourced investment research platform. We find the ability of retail order imbalances to predict the cross-section of stock returns and cash-flow news increases sharply in the intraday post-publication window relative to the pre-publication window. The findings are robust to controlling for report tone and stronger for reports authored by more capable contributors. The evidence suggests that recent technology-enabled innovations in how individuals share information help retail investors become better informed. |
| Keywords | Investment research, Seeking alpha, retail investors, informed trading |
| URL | https://www.sciencedirect.com/science/article/abs/pii/S0304405X21004050 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Social Network Structure |
Word-of-mouth communication and financial decision making
| Authors | Hwang |
| Year | 2022 |
| Type | Working Paper | Literature Review Paper |
| Abstract | I review the empirical literature on word of mouth (WOM) among investors. I begin with an outline of the empirical challenges that WOM research faces and possible strategies to overcome those challenges. I then discuss recent studies on WOM among retail and institutional investors. The research to date provides compelling evidence that WOM importantly determines investment decisions. On balance, the information transmitted through WOM does not appear to help investors make better investment decisions. I explore possible reasons. I also discuss potential asset pricing implications, the emergence of social technologies, and possible avenues for future research. |
| Keywords | Social asset pricing, social finance, investor psychology, investor behavior, asset prices |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4118285 |
| Tags | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) | Propagation of Noise / Undesirable Outcomes | Social Network Structure | Social Transmission Biases |
The long-lasting effects of living under communism on attitudes towards financial markets
| Authors | Laudenbach, Malmendier, Niessen-Ruenzi |
| Year | 2022 |
| Type | Working Paper |
| Abstract | We analyze the long-term effects of living under communism and its anticapitalist doctrine on households' financial investment decisions and attitudes towards financial markets. Utilizing comprehensive German brokerage data and bank data, we show that, decades after Reunification, East Germans still invest significantly less in the stock market than West Germans. Consistent with communist friends-and-foes propaganda, East Germans are more likely to hold stocks of companies from communist countries (China, Russia, Vietnam) and of state-owned companies, and are unlikely to invest in American companies and the financial industry. Effects are stronger for individuals exposed to "positive emotional tagging", e. g., those living in celebrated showcase cities. Effects reverse for individuals with negative experiences, e.g., environmental pollution, religious oppression, or lack of (Western) TV entertainment. Election years trigger further divergence of East and West Germans. We provide evidence of negative welfare consequences due to less diversified portfolios, higher-fee products, and lower risk-adjusted returns. |
| Keywords | Capital markets, communism, memory, emotional tagging, stock-market participation |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3526926 |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) |
Game on: Social networks and markets
| Authors | Pedersen |
| Journal | Journal of Financial Economics |
| Year | 2022 |
| Type | Published Paper |
| Abstract | I present closed-form solutions for prices, portfolios, and beliefs in a model where four types of investors trade assets over time: naive investors who learn via a social network, "fanatics" possibly spreading fake news, and rational short- and long-term investors. I show that fanatic and rational views dominate over time, and their relative importance depends on their following by influencers. Securities markets exhibit social network spillovers, large effects of influencers and thought leaders, bubbles, bursts of high volume, price momentum, fundamental momentum, and reversal. The model sheds new light on the GameStop event, historical bubbles, and asset markets more generally. |
| Keywords | Networks influencers, social media, bubbles, asset prices, belief formation, momentum, reversal |
| URL | https://www.sciencedirect.com/science/article/pii/S0304405X22000964 |
| Tags | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) | Theory |
Social Networks, trading, and liquidity
| Authors | Peng, Wang, Zhou |
| Year | 2022 |
| Type | Working Paper | Literature Review Paper |
| Abstract | The recent meme stock saga has drawn attention to the growing role of social networks in capital markets. In this paper, the authors summarize the latest research that uses large scale, representative, real-world social network data to study social networks' influences on trading, liquidity, and valuations of stocks. Institutional investors invest more heavily in stocks if there are strong social ties between the geographic locations of the institution's headquarters and the firm's headquarters. Further, a firm's social ties to large institutional investors reduce its cost of capital, increase its valuation, and strengthen its liquidity. Social networks help to timely disseminate important news releases into prices, but also trigger belief divergence and generate persistent excess trading. Moreover, social interactions can amplify investors' behavioral biases and contribute to retail investors' attraction to lottery-type stocks. The authors provide additional examples to further illustrate why the roles of social networks are of particular importance to market participants. |
| Keywords | Social networks, market liquidity |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4099114 |
| Tags | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) | Manager / Firm Behavior | Propagation of Noise / Undesirable Outcomes | Social Network Structure | Theory |
Social Networks, trading, and liquidity
| Authors | Peng, Wang, Zhou |
| Year | 2022 |
| Type | Working Paper | Literature Review Paper |
| Abstract | The recent meme stock saga has drawn attention to the growing role of social networks in capital markets. In this paper, the authors summarize the latest research that uses large scale, representative, real-world social network data to study social networks' influences on trading, liquidity, and valuations of stocks. Institutional investors invest more heavily in stocks if there are strong social ties between the geographic locations of the institution's headquarters and the firm's headquarters. Further, a firm's social ties to large institutional investors reduce its cost of capital, increase its valuation, and strengthen its liquidity. Social networks help to timely disseminate important news releases into prices, but also trigger belief divergence and generate persistent excess trading. Moreover, social interactions can amplify investors' behavioral biases and contribute to retail investors' attraction to lottery-type stocks. The authors provide additional examples to further illustrate why the roles of social networks are of particular importance to market participants. |
| Keywords | social networks, market liquidity |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4099114 |
| Tags | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) | Manager / Firm Behavior | Propagation of Noise / Undesirable Outcomes | Social Network Structure | Theory |
Social contagion and asset prices: Reddit's self-organised bull runs
| Authors | Semenova, Winkler |
| Year | 2022 |
| Type | Working Paper |
| Abstract | This paper develops an empirical and theoretical case for how `hype' among retail investors can drive large asset price fluctuations. We use text data from discussions on WallStreetBets (WSB), an online investor forum with over eleven million followers as of February 2022, as a case study to demonstrate how retail investors influence each other, and how social behaviors impact financial markets. We document that WSB users adopt price predictions about assets (bullish or bearish) in part due to the sentiments expressed by their peers. Discussions about stocks are also self-perpetuating: narratives about specific assets spread at an increasing rate before peaking, and eventually diminishing in importance -- a pattern reminiscent of an epidemiological setting. To consolidate these findings, we develop a model for the impact of social dynamics among retail investors on asset prices. We find that the interplay between 'trend following' and 'consensus formation' determines the stability of price returns, with socially-driven investing potentially causing oscillations and cycles. Our framework helps identify components of asset demand stemming from social dynamics, which we predict using WSB data. Our predictions explain significant variation in stock market activity. These findings emphasize the role that social dynamics play in financial markets, amplified by online social media. |
| Keywords | Social media analysis, sentiment contagion, asset prices |
| URL | https://arxiv.org/abs/2104.01847 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Media and Textual Analysis | Theory |
Investor attention or investor sentiment: How social media react to ESG?
| Authors | Zhang, Xu, Hong, Chan |
| Year | 2022 |
| Type | Working Paper |
| Abstract | The ESG (environmental, social, and governance) practice has become very important in contemporary business, and it is believed to have a significant impact on firm value. However, how investors react to firms' ESG performance is still unknown. Exploiting user-generated content from a popular online investment community (Seeking Alpha) and ESG performance scores from a professional database (Sustainalytics), we first run a fixed-effect panel regression and find an overall positive relationship between ESG and investor attention but no relationship between ESG and investor sentiment. We then conduct an event-study analysis, in which we classify changes in ESG performance as upgrade and downgrade events and find that the significant relationship between ESG and investor attention holds for the downgrade events but not for the upgrade events. We also conduct various robustness checks, on both ESG and investor attention, to rule out potential effects of other factors, such as firm size, debt, intangible assets, and profitability. Our further mechanism analysis reveals that the effect of ESG on investor attention is driven by the social and governance factors rather than the environmental factors. Our work makes both theoretical and practical contributions by identifying the nuanced effect of ESG on investors' reactions in the social media era. |
| Keywords | ESG, investor attention, investor sentiment, social media, online investment communities |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3905195&dgcid=ejournal_htmlemail_capital:markets:market:efficiency:ejournal_abstractlink |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Media and Textual Analysis |
Social finance as cultural evolution, transmission bias, and market dynamics
| Authors | Akcay, Hirshleifer |
| Journal | Proceedings of the National Academy of Sciences |
| Year | 2021 |
| Type | Published Paper | Literature Review Paper |
| Abstract | The thoughts and behaviors of financial market participants depend upon adopted cultural traits, including information signals, beliefs, strategies, and folk economic models. Financial traits compete to survive in the human population and are modified in the process of being transmitted from one agent to another. These cultural evolutionary processes shape market outcomes, which in turn feed back into the success of competing traits. This evolutionary system is studied in an emerging paradigm, social finance. In this paradigm, social transmission biases determine the evolution of financial traits in the investor population. It considers an enriched set of cultural traits, both selection on traits and mutation pressure, and market equilibrium at different frequencies. Other key ingredients of the paradigm include psychological bias, social network structure, information asymmetries, and institutional environment. |
| Keywords | Evolutionary finance, cultural evolution, social interaction, behavioral economics, social finance |
| URL | https://www.pnas.org/doi/10.1073/pnas.2015568118 |
| Tags | Asset Pricing, Trading Volume and Market Efficiency | Consumer Decisions | Evolutionary Finance | Financing- and Investment Decisions (Individual) | Propagation of Noise / Undesirable Outcomes | Social Network Structure | Social Transmission Biases | Theory |
Do individual investors trade on investment-related Internet postings?
| Authors | Ammann, Schaub |
| Journal | Management Science |
| Year | 2021 |
| Type | Published Paper |
| Abstract | Many people share investment ideas online. This study investigates whether individual investors trade on investment-related internet postings. We use unique data from a social trading platform that allow us to observe the shared portfolios of traders, their posted comments, and the replicating transactions of followers. We find robust evidence that followers increasingly replicate shared portfolios of traders after the posting of comments. However, postings do not help followers identify portfolios that deliver superior performance in the future. In a cross-sectional analysis, we show that it is mainly followers typically considered to be unsophisticated who trade after comment postings. |
| Keywords | Internet postings, individual investors, trading behavior, social trading, FinTech |
| URL | https://pubsonline.informs.org/doi/10.1287/mnsc.2020.3733 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) |
Attention, social interaction, and investor attraction to lottery stocks
| Authors | Bali, Hirshleifer, Peng, Tang |
| Year | 2021 |
| Type | Working Paper |
| Abstract | We find that among stocks dominated by retail investors, the lottery anomaly is amplified by high investor attention (proxied by high analyst coverage, salient earnings surprises, or recency of extreme positive returns) and intense social interactions (proxied by Facebook social connectedness or population density near firm headquarters). Such stocks' lottery features attract greater Google search volume and retail net buying, followed by more negative earnings surprises and lower announcement-period returns. The findings provide insight into the roles of attention and social interaction in securities markets, and support the hypothesis that these forces contribute to investor attraction to lottery stocks. |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3978401 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) |