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 risk and return of impact investing funds
| Authors | Jeffers, Lyu, Posenau |
| Year | 2022 |
| Type | Working Paper |
| Abstract | We provide the first analysis of the risk exposure and risk-adjusted performance of impact investing funds, private market funds with dual financial and social goals. We introduce a dataset of impact fund cash flows and exploit distortions in VC performance measures to characterize risk profiles. Impact funds have a lower market beta than comparable private market strategies. Accounting for market risk exposure, impact funds underperform the public market, though not more so than comparable strategies. Adding a public sustainability factor to our pricing model helps explain impact returns, though the correlation of fund cash flows with this factor is not necessarily positive. |
| Keywords | Impact investing, private equity, venture capital |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3949530 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Theory |
The risk and return of impact investing funds
| Authors | Jeffers, Lyu, Posenau |
| Year | 2022 |
| Type | Working Paper |
| Abstract | We provide the first analysis of the risk exposure and risk-adjusted performance of impact investing funds, private market funds with dual financial and social goals. We introduce a dataset of impact fund cash flows and exploit distortions in VC performance measures to characterize risk profiles. Impact funds have a lower market β than comparable private market strategies. Accounting for β, impact funds underperform the public market, though not more so than comparable strategies. Adding a public sustainability factor to our pricing model helps explain impact returns, though the correlation of fund cash flows with this factor is not necessarily positive. |
| Keywords | impact investing, private equity, venture capital |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3949530 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Theory |
Clients' connections: Measuring the role of private information in decentralized markets
| Authors | Kondor, Pinter |
| Journal | Journal of Finance |
| Year | 2022 |
| Type | Published Paper |
| Abstract | We propose a new measure of private information in decentralized markets-connections-which exploits the time variation in the number of dealers with whom a client trades in a time period. Using trade-level data for the U.K. government bond market, we show that clients perform better when having more connections as their trades predict future price movements. Time variation in market-wide connections also helps explain yield dynamics. Given our novel measure, we present two applications suggesting that (i) dealers pass on information, acquired from their informed clients, to their affiliates, and (ii) informed clients better predict the orderflow intermediated by their dealers. |
| URL | https://onlinelibrary.wiley.com/doi/ftr/10.1111/jofi.13087 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency |
Social learning and analyst behavior
| Authors | Kumar, Rantala, Xu |
| Journal | Journal of Financial Economics |
| Year | 2022 |
| Type | Published Paper |
| Abstract | This study examines whether sell-side equity analysts engage in "social learning" in which their earnings forecasts for certain firms are influenced by the forecasts and outcomes of "peer" analysts associated with other firms in their respective portfolios. We find that analyst optimism is negatively correlated with recent forecast errors, by peers, on other firms in the analyst's portfolio. An analyst is also more likely to issue "bold" forecasts when peers recently issued similar forecasts for other portfolio firms. Analysts learn more from peers with similar personal characteristics. Overall, social learning benefits analysts and improves their forecast accuracy. |
| Keywords | Sell-side equity analysts, social learning, bold forecasts, forecast accuracy |
| URL | https://www.sciencedirect.com/science/article/pii/S0304405X21002774 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency |
Social learning and analyst behavior
| Authors | Kumar, Rantala, Xu |
| Journal | Journal of Financial Economics |
| Year | 2022 |
| Type | Published Paper |
| Abstract | This study examines whether sell-side equity analysts engage in "social learning" in which their earnings forecasts for certain firms are influenced by the forecasts and outcomes of "peer" analysts associated with other firms in their respective portfolios. We find that analyst optimism is negatively correlated with recent forecast errors, by peers, on other firms in the analyst's portfolio. An analyst is also more likely to issue "bold" forecasts when peers recently issued similar forecasts for other portfolio firms. Analysts learn more from peers with similar personal characteristics. Overall, social learning benefits analysts and improves their forecast accuracy. |
| Keywords | Sell-side equity analysts, social learning, bold forecasts, forecast accuracy |
| URL | https://doi.org/10.1016/j.jfineco.2021.06.011 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Productivity Spillovers | Social Network Structure |
Differential treatment and local information advantage: Revelations from translation differences
| Authors | Lang, Stice-Lawrence, Wong, Wong |
| Year | 2022 |
| Type | Working Paper |
| Abstract | We develop an empirical proxy for the differential treatment of local and foreign investors using translation differences in public disclosure as observable indicators that reflect non-public interactions. After confirming the validity of our proxy, we show that differential treatment results in significant information asymmetry between local and foreign investors as measured through stock illiquidity, and analysis of analyst forecast errors suggests that this information asymmetry is created by firms providing foreign market participants with lower quality information. Firms respond to strategic incentives for differential treatment relating to government subsidies and capital raising, and thus differential treatment is not just a byproduct of resource constraints. Our results highlight the role of differential treatment as one driver of local information advantage. |
| Keywords | Differential treatment, local information advantage, translation differences, financial disclosure, information asymmetry, textual analysis, globalization |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3956105&dgcid=ejournal_htmlemail_capital:markets:market:efficiency:ejournal_abstractlink |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Manager / Firm Behavior | Media and Textual Analysis |
Shall we talk? The role of interactive investor platforms in corporate communication
| Authors | Lee, Zhong |
| Journal | Journal of Accounting and Economics |
| Year | 2022 |
| Type | Published Paper |
| Abstract | Between 2010 and 2017, Chinese investors used an investor interactive platform (IIP) to ask public companies around 2.5 million questions, the vast majority of which received a reply within two weeks. We analyze these IIP dialogues using a BERT-based algorithm and provide preliminary evidence on their causes and consequences. Our analyses show most questions reflect investors' difficulties in processing information already in the public domain. Controlling for other news, higher IIP activity is associated with increases in trading volume, return volatility, market liquidity, and price informativeness as well as decreases in bid-ask spread. Financial statement-related postings increase around the adoption of new accounting standards. Collectively, our results show that investors face significant information processing costs but that IIP activities help reduce these costs, leading to improvements in stock price formation. |
| Keywords | Corporate disclosure, investor relations, information processing costs, interactive communication, market liquidity, price informativeness |
| URL | https://www.sciencedirect.com/science/article/pii/S0165410122000477 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Manager / Firm Behavior |
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 |
Influencers, inefficiency and fraud - The Bitcoin price discovery network under the microscope
| Authors | Trimborn, Chen, Chen |
| Year | 2022 |
| Type | Working Paper |
| Abstract | We present a TriSNAR modeling framework for understanding the dynamic interactions of multiple markets for Bitcoin trading, including market efficiency, and for identifying influential exchanges in the global trading network. We are particularly interested in identifying exchanges that are market leaders. Out of 339 weeks (6.5 years of data), we identify 104 weeks in which TriSNAR provides the best MSFE out of 6 contestants and significantly outperforms all other models. Among 194 Bitcoin exchanges, we find that exchange Kraken was the leading exchange prior to the market frenzy of 2017, in particular in 2016. In addition, price discovery shows that the Bitcoin exchange networks efficiency decreased from 2015 to 2017, and increased since 2018. We analyse the relation between blockchain fund flows and influential exchanges, and observe that wealthy holders of Bitcoin transact funds to exchanges when influential exchanges arise. We investigate the finite sample and asymptotic properties of TriSNAR. Compared to alternative methods, TriSNAR outperforms in terms of accuracy and ability to discover multi-market network structures. |
| Keywords | Influencer identification, blockchain network analysis, market efficiency, structure detection, bitcoin exchanges |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4071212 |
| Tags | Asset Pricing, Trading Volume and Market Efficiency | Social Network Structure | 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 Sciences of the United States of America |
| Year | 2021 |
| Type | Published 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://doi.org/10.1073/pnas.2015568118 |
| Tags | Asset Pricing, Trading Volume and Market Efficiency | Evolutionary Finance | Social Network Structure | Social Transmission Biases | Theory |
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 |
Back to the roots: Ancestral origin and mutual fund manager portfolio choice
| Authors | Ammann, Cochardt, Straumann, Weigert |
| Year | 2021 |
| Type | Working Paper |
| Abstract | We exploit variation in the ancestries of U.S. equity mutual fund managers and show that ancestry affects portfolio decisions. Controlling for fund firm location, we find that funds overweight stocks from their managers' ancestral home countries in their non-U.S. portfolio by 132 bps or 20.34% compared with their peers. Similarly, funds overweight industries that are comparatively large in their manager's ancestral home countries. The documented ancestral biases are pervasive across fund styles and across different manager ancestries. The effect is more pronounced for funds that are less resource-constrained and for managers whose connection to their ancestral home country is more recent. Stocks linked to managers' ancestry do not outperform stocks in the same countries and industries but held by managers of other ancestry, confirming that ancestry-linked investments are not informed. |
| Keywords | Culture, home bias, mutual funds, portfolio choice, fund managers |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3879492 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Investment Decisions (Institutional) | Manager / Firm Behavior |
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) |
Do teams alleviate or exacerbate behavioral biases? Evidence from extrapolation bias in mutual funds
| Authors | Barahona, Cassella, Jansen |
| Year | 2021 |
| Type | Working Paper |
| Abstract | Whether teams attenuate or exacerbate the behavioral biases which are pervasive at the individual level is an open question. To address this question, we use the mutual fund industry as a laboratory. Our focus is on how return extrapolation is transmitted from individual fund managers to the team-managed funds they join. We show that teams heavily attenuate the influence of extrapolation bias on funds' trading behavior. Additional analysis reveals that this attenuation is not due to differences in investment experience, compensation contracts, workload, and investment styles between solo-managed and team-managed funds. Rather, our evidence suggests that the elicitation of team members' inner cognitive reflection can be responsible for teams' reduction in behavioral biases. Our results highlight the attenuation of the extrapolation bias as a potential benefit of team-based asset management. |
| Keywords | Behavioral biases, extrapolation, heuristics, mutual funds, teams |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3783421 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Investment Decisions (Institutional) | Manager / Firm Behavior | Theory |