The impact of social media influencers on the financial market performance of firms
| Authors | Zhang, Keasey, Lambrinoudakis, Mascia |
| Year | 2023 |
| Type | Working Paper |
| Abstract | A key development in social media has been the remarkable growth of influencers and their increasing use by firms to manage their online presence and image, and to promote their products. Despite the huge growth of influencers and their use by firms, there is a lack of analysis of social media influencers and their impact on the financial market performance of firms. Anecdotal evidence suggests mega influencers are able to affect the stock prices of firms via social media. We ask whether the effect on stock prices identified in anecdotal evidence is generalizable to all mega influencers and other financial market characteristics of firms. After developing hypotheses from the Noise Trader model and using a hand collected dataset of more than 11,000,000 mega influencer posts on Instagram (2012-2019), we find that mega influencers affect investors' attention, volatility, trading volume and, through extreme sentiment posts, stock returns. The effect on returns is, however, very short lived. Companies need to be aware of these stock market consequences if they intend to use influencers for external image purposes and/or product promotion. |
| Keywords | Influencers, mega influencers, investors, sentiment, firms, financial market performance |
| URL | https://business.leeds.ac.uk/departments-accounting-finance/staff/71/dr-costas-lambrinoudakis |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Investment Decisions (Institutional) | Propagation of Noise / Undesirable Outcomes |
Do hedge funds strategically misreport their holdings? Evidence from 13F restatements
| Authors | Cao, Da, Jiang, Yang |
| Year | 2022 |
| Type | Working Paper |
| Abstract | Hedge funds can subsequently amend their originally reported 13F quarterly holdings using restatements. We conduct the first systematic analysis of such filings, which are as common as confidential filings (used by funds to delay holdings disclosures), but affect four times as many stocks. Restated holdings are associated with significant abnormal returns, suggesting that some original holdings are strategically misreported to hide fundsâ trading intentions. We construct a return gap measure to gauge the value added by such restatements and find that it predicts future fund performance. Finally, commonly used databases such as Thomson Reuters do not fully adjust for restatements. |
| Keywords | Strategic disclosure, hedge funds, ownership disclosure, 13F holdings, restatement, fund skill |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3907560 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Investment Decisions (Institutional) | 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 |
It's a small world: The importance of social connections with auditors to mutual fund managers' portfolio decisions
| Authors | Chen, Huang, Li, Pittman |
| Journal | Journal of Accounting Research |
| Year | 2022 |
| Type | Published Paper |
| Abstract | We find that mutual funds whose managers are socially connected with firm auditors hold more shares of these firms and generate superior portfolio returns. Cross-sectional results reveal that the relation between social connections and mutual fund stockholdings is more pronounced: when the social connections are stronger, when the auditor is in a better position or has stronger incentives to acquire private information, when the fund manager exercises more power, for small audit firms, for auditors in areas with poor investor protection, and for public firms with greater business opacity or private information. Other results are consistent with fund managers electing to schedule their corporate site visits to coincide with the fieldwork of their connected auditors, as would be expected if fund managers time their visits to meet with these auditors to facilitate information transfer. Additionally, we observe associations between fund trading prior to earnings surprises and audit opinions, and the presence of social connections between fund managers and firm auditors. Finally, we show that mutual funds and firms in which they invest tend to appoint connected auditors and pay them higher fees. Collectively, we document empirical patterns that would arise if socially connected auditors and mutual fund managers share information. |
| URL | https://onlinelibrary.wiley.com/doi/full/10.1111/1475-679X.12395 |
| Tags | Archival Empirical | Investment Decisions (Institutional) |
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 |
Does individualism matter for hedge funds? A cross-country examination
| Authors | Dai, Nahata, Brauner |
| Journal | Journal of Corporate Finance |
| Year | 2022 |
| Type | Published Paper |
| Abstract | We examine how individualism, a cultural attribute that emphasizes autonomy, ability, and self-belief, affects hedge funds (HFs). Using Hofstede's framework, we show HFs located in individualistic (IDV) cultures structure their contracts with more performance-driven incentives, take greater risk, and herd less. Individualism also influences risk-shifting behavior: after initial underperformance, HFs increase risk-taking in high IDV cultures. Yet, HFs do not outperform in individualistic countries and draw lower Sharpe ratios, which highlights the link between individualism and overconfidence/over-optimism. Interestingly, HFs' survival is less sensitive to performance in individualistic cultures, again consistent with greater autonomy and opportunities in these countries. |
| Keywords | Culture, individualism, hedge fund contracts, risk-taking, survival |
| URL | https://doi.org/10.1016/j.jcorpfin.2021.102155 |
| Tags | Archival Empirical | Investment Decisions (Institutional) | Manager / Firm Behavior |
Strategic learning and corporate investment
| Authors | Decaire, Wittry |
| Year | 2022 |
| Type | Working Paper |
| Abstract | We show that firms anticipate information spillover from peers' investment decisions and delay project exercise to learn from them. While this information improves project selection, the cost of waiting erodes these gains. To establish causality, we exploit local exogenous variation from the 1800s that shapes the number of peers that a firm can learn from today. The effect is most salient when information is scarce, costs of waiting are low, projects have low expected profitability, and the source information is more relevant. Finally, the anticipation of spillovers dampens aggregate investment, suggesting a role for this mechanism in macro-investment models. |
| Keywords | Real options, strategic interactions, learning, peer behavior, investment, historical data |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3923811 |
| Tags | Archival Empirical | Investment Decisions (Institutional) | Manager / Firm Behavior |
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 |
Political ideology and international capital allocation
| Authors | Kempf, Luo, Schafer, Tsoutsoura |
| Year | 2022 |
| Type | Working Paper |
| Abstract | Does investors' political ideology shape international capital allocation? We provide evidence from two settings-syndicated corporate loans and equity mutual funds-to show ideological alignment with foreign governments affects the cross-border capital allocation by U.S. institutional investors. Ideological alignment on both economic and social issues plays a role. Our empirical strategy ensures direct economic effects of foreign elections or government ties between countries are not driving the result. Ideological distance between countries also explains variation in bilateral investment. Combined, our findings imply ideological alignment is an important, omitted factor in models of international capital allocation. |
| Keywords | Capital flows, syndicated loans, mutual funds, political ideology, elections |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3904077 |
| Tags | Archival Empirical | Investment Decisions (Institutional) | Manager / Firm Behavior |
Social proximity to capital: Implications for investors and firms
| Authors | Kuchler, Li, Peng, Stroebel, Zhou |
| Journal | The Review of Financial Studies |
| Year | 2022 |
| 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. |
| URL | https://academic.oup.com/rfs/article-abstract/35/6/2743/6372708?redirectedFrom=fulltext |
| Tags | Archival Empirical | Investment Decisions (Institutional) | Social Network Structure |
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 |
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 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 |
Does firm investment respond to peers' investment?
| Authors | Bustamante, Fresard |
| Journal | Management Science |
| Year | 2021 |
| Type | Published Paper |
| Abstract | We study whether, how, and why the investment of a firm depends on the investment of other firms in the same product market. Using an instrumental variable based on the presence of local knowledge externalities, we find a sizeable complementarity of investment among product market peers, holding across a large majority of sectors. Peer effects are stronger in concentrated markets, featuring more heterogeneous firms, and for smaller firms with less precise information. Our findings are consistent with a model in which managers are imperfectly informed about fundamentals and use peers' investments as a source of information. Product market peer effects in investment could amplify shocks in production networks. |
| Keywords | Investment, peer effect, competition, agglomeration economies |
| URL | https://doi.org/10.1287/mnsc.2020.3695 |
| Tags | Archival Empirical | Investment Decisions (Institutional) | Manager / Firm Behavior | Social Transmission Biases | Theory |
Tacit collusion among dominant banks: Evidence from round-yard loan pricing
| Authors | Chan, Lin, Lin |
| Year | 2021 |
| Type | Working Paper |
| Abstract | While there is no apparent reason for loan spreads to cluster at certain numbers, we find that around 70% of loans have round-yard spreads (i.e., multiples of 25 basis points). We hypothesize that dominant banks implicitly collude by using the round-yards as focal pricing points when negotiating with their borrowers. The tacit collusion leads to higher spreads and total costs of the round-yard-priced loans than non-round-yard-priced loans. Consistent with our tacit collusion hypothesis, dominant banks round up rather than round down loan spreads to the multiples of yards. Moreover, round-yard pricing is more prevalent among lower-quality and non-repeat borrowers. Overall, we provide the first evidence that dominant banks use round-yard pricing as an effective tool for tacit collusion in the loan market. |
| Keywords | Tacit collusion, dominant banks, round-yard pricing, bargaining power, loan spreads, round up |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3905375&dgcid=ejournal_htmlemail_behavioral:experimental:finance:ejournal_abstractlink |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) |
Regressive mortgage credit redistribution in the post-crisis era
| Authors | D'Acunto, Rossi |
| Journal | Review of Financial Studies |
| Year | 2021 |
| Type | Published Paper |
| Abstract | We document four secular trends about U.S. mortgage origination by traditional and FinTech lenders after the 2008-2009 financial crisis. First, since 2011, the overall number, size, and approval rate of small and medium-sized loans have been decreasing over time, relative to large loans. Second, the largest lenders redistribute their lending the most. Third, this loan-size redistribution of credit increases in the size of the lender. Fourth, the effects are stronger for mortgages further away from the conforming loan limit(s) in both directions. We argue that the supply of credit drives these secular trends, and we assess several potential economic mechanisms. |
| Keywords | Redistribution of mortgage credit, financial regulation reforms, supply-side forces, post-crisis era |
| URL | https://doi.org/10.1093/rfs/hhab008 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) |
Social transmission bias and investor behavior
| Authors | Han, Hirshleifer, Walden |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2021 |
| Type | Published Paper |
| Abstract | We offer a new social approach to investment decision making and asset prices. Investors discuss their strategies and convert others to their strategies with a probability that increases in investment returns. The conversion rate is shown to be convex in realized returns. Unconditionally, active strategies (e.g., high variance and skewness) dominate, although investors have no inherent preference for these characteristics. The model has strong predictions for how the adoption of active strategies depends on investors's social networks. In contrast with nonsocial approaches, sociability, self-enhancing transmission, and other features of the communication process determine the popularity and pricing of active investment strategies. |
| URL | https://doi.org/10.1017/S0022109021000077 |
| Tags | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) | Social Transmission Biases | Theory |
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 |