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 |
Social media analysts and sell-side analyst research
| Authors | Drake, Moon, Twedt, Warren |
| Journal | Review of Accounting Studies |
| Year | 2022 |
| Type | Published Paper |
| Abstract | We examine how research posted by "social media analysts" (SMAs) - individuals posting equity research online via social media investment platforms - is related to research subsequently produced by professional sell-side equity analysts. Using data from Seeking Alpha, we find that the market reaction to sell-side analyst research is substantially reduced when the analyst research is preceded by the report of an SMA, and that this is particularly true of sell-side analysts' earnings forecasts. We further find that this effect is more pronounced when SMA reports contain more decision-useful language, are produced by SMAs with greater expertise, and relate to firms with greater retail investor ownership. We also provide evidence that the attenuated response to sell-side research is most likely explained by SMA research preempting information in sell-side research and that analysts respond to SMA preemption with bolder and more disaggregated forecasts. Collectively, our results suggest that equity research posted online by SMAs provides investors with information that is similar to but arrives earlier than sell-side equity research, and speak to the connected and evolving roles of information intermediaries in capital markets. |
| Keywords | Social media analyst, sell-side analyst, information intermediaries, equity research |
| URL | https://link.springer.com/article/10.1007/s11142-021-09645-1 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Media and Textual Analysis |
Democracy and the pricing of initial public offerings around the world
| Authors | Duong, Goyal, Kallinterakis, Veeraraghavan |
| Journal | Journal of Financial Economics |
| Year | 2022 |
| Type | Published Paper |
| Abstract | We find a negative relation between democracy and initial public offering (IPO) underpricing for a sample of 23,050 IPOs across 45 countries. The effect of democracy on underpricing is weaker for IPOs audited by Big 4 auditing firms, backed by venture capital firms, and with better disclosure specificity of use of proceeds. Democracy exerts a larger influence on underpricing for firms with higher agency problems, in countries with weaker institutional quality or shareholder protection, and during periods of high investor sentiment or economic policy uncertainty. Overall, our results highlight the importance of democracy in reducing IPO underpricing around the world. |
| Keywords | Democracy, IPO underpricing, information asymmetry, corporate governance |
| URL | https://doi.org/10.1016/j.jfineco.2021.07.010 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Manager / Firm Behavior |
Using social network activity data to identify and target job seekers
| Authors | Ebbes, Netzer |
| Journal | Management Science |
| Year | 2022 |
| Type | Published Paper |
| Abstract | An important challenge for many firms is to identify the life transitions of its customers, such as job searching, expecting a child, or purchasing a home. Inferring such transitions, which are generally unobserved to the firm, can offer the firms opportunities to be more relevant to their customers. In this paper, we demonstrate how a social network platform can leverage its longitudinal user data to identify which of its users are likely to be job seekers. Identifying job seekers is at the heart of the business model of professional social network platforms. Our proposed approach builds on the hidden Markov model (HMM) framework to recover the latent state of job search from noisy signals obtained from social network activity data. Specifically, we use the latent states of the HMM to fuse cross-sectional survey responses to a job-seeking status question with longitudinal user activity data, resulting in a partially HMM. Thus, in some time periods, and for some users, we observe a direct measure of the true job-seeking status. We demonstrate that the proposed model can predict not only which users are likely to be job seeking at any point in time but also what activities on the platform are associated with job search and how long the users have been job seeking. Furthermore, we find that targeting job seekers based on our proposed approach can lead to a 29% increase in profits of a targeting campaign relative to the approach that was used by the social network platform. |
| URL | https://pubsonline.informs.org/doi/abs/10.1287/mnsc.2021.3995 |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical | Manager / Firm Behavior | Social Network Structure |
The effects of online review platforms on restaurant revenue, consumer learning, and welfare
| Authors | Fang |
| Journal | Management Science |
| Year | 2022 |
| Type | Published Paper |
| Abstract | This paper quantifies the effects of online review platforms on restaurant revenue and consumer welfare. Using a novel data set containing revenues and information from major online review platforms in Texas, I show that online review platforms help consumers learn about restaurant quality more quickly. The effects on learning show up in restaurant revenues. Specifically, doubling the review activity increases the revenue of a high-quality independent restaurant by 5%-19% and decreases that of a low-quality restaurant by a similar amount. These effects vary widely across restaurants' locations. Restaurants around highway exits are affected twice as much as those in nonhighway areas, implying that reviews are more useful to travelers and tourists than locals. The effects also decline as restaurants age, consistent with the diminishing value of information in learning. In contrast, chain restaurants are affected to a much lesser degree than independent restaurants. Building on this evidence, I develop a structural demand model with aggregate social learning. Counterfactual analyses indicate that online review platforms raise consumer welfare much more for tourists than for locals. By encouraging consumers to eat out more often at high-quality independent restaurants, online review platforms increased the total industry revenue by 3.0% over the period from 2011-2015. |
| URL | https://pubsonline.informs.org/doi/abs/10.1287/mnsc.2021.4279 |
| Tags | Archival Empirical | Consumer Decisions |
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 |
Impact of social interactions on duopoly competition with quality considerations
| Authors | Geng, Guo, Xiao |
| Journal | Management Science |
| Year | 2022 |
| Type | Published Paper |
| Abstract | We study the impacts of social interactions on competing firms' quality differentiation, pricing decisions, and profit performance. Two forms of social interactions are identified and analyzed: (1) market-expansion effect (MEE)-the total market expands as a result of both firms' sales-and (2) value-enhancement effect (VEE)-a consumer gains additional utility of purchasing from one firm based on this firm's previous and/or current sales volume. We consider a two-stage duopoly competition framework, in which both firms select quality levels in the first stage simultaneously and engage in a two-period price competition in the second stage. In the main model, we assume that each firm sets a single price and commits to it across two selling periods. We find that both forms of social interactions tend to lower prices and intensify price competition for given quality levels. However, MEE weakens the product-quality differentiation and is benign to both high-quality and low-quality firms. It also benefits consumers and improves social welfare. By contrast, VEE enlarges the quality differentiation and only benefits the high-quality firm, but is particularly malignant to the low-quality firm. It further reduces the consumers' monetary surplus. Such impact is consistent, regardless of whether the VEE interactions involve previous or current consumers. We further discuss several model extensions, including dynamic pricing, combined social effects, and various cost structures, and verify that the aforementioned impacts of MEE and VEE are qualitatively robust to those extensions. Our results provide important managerial insights for firms in competitive markets and suggest that they need to not only be aware of the consumers' social interactions, but also, more importantly, distinguish the predominant form of the interactions so as to apply proper marketing strategies. |
| URL | https://pubsonline.informs.org/doi/abs/10.1287/mnsc.2021.3972 |
| Tags | Archival Empirical | Manager / Firm Behavior |
A theory of financial media
| Authors | Goldman, Martel, Schneemeier |
| Journal | Journal of Financial Economics |
| Year | 2022 |
| Type | Published Paper |
| Abstract | We present a model of media coverage of corporate announcements. Firms strategically use the media to communicate corporate announcements to a group of traders who observe announcements not directly but through media reports. Journalists strategically select which announcements to report to readers. Media coverage inadvertently incentivizes firms to manipulate the underlying announcements. In equilibrium, media coverage is tilted towards less manipulated negative news. The presence of financial journalists leads to more manipulation but makes stock prices more informative on average. We provide additional predictions regarding the media's impact on the quality of firm announcements and stock prices. |
| Keywords | Financial journalism, disclosure, manipulation, price quality |
| URL | https://www.sciencedirect.com/science/article/pii/S0304405X21003081 |
| Tags | Archival Empirical | Manager / Firm Behavior | Theory |
Labor reactions to credit deterioration: Evidence from LinkedIn activity
| Authors | Gortmaker, Jeffers, Lee |
| Year | 2022 |
| Type | Working Paper |
| Abstract | We analyze worker reactions to firms' credit deterioration. Using weekly anonymized networking activity on LinkedIn, we show workers initiate more connections immediately following a negative credit event, even at firms far from bankruptcy. Our results suggest that workers are driven by concerns about both unemployment and future prospects at their firm. Heightened networking activity is associated with contemporaneous and future departures, especially at highly-rated firms. Other negative events like missed earnings and equity sell recommendations do not trigger similar reactions. Overall, our results indicate that the latent build-up of connections triggered by credit deterioration represents a source of fragility for firms. |
| Keywords | Network formation, credit deterioration, labor & finance, financial distress, labor fragility |
| URL | https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=3456285 |
| Tags | Archival Empirical | Media and Textual Analysis | Social Network Structure |
Competing for talent: Firms, managers, and social networks
| Authors | Hacamo, Kleiner |
| Journal | The Review of Financial Studies |
| Year | 2022 |
| Type | Published Paper |
| Abstract | Do social networks help firms recruit talented managers? In our setting, firms are randomly connected to prospective young managers through former employees. Under a discrete choice model, we find networks increase the likelihood firms hire high-ability managers, while having no effect on the hiring rate of low-ability managers. Effects are greatest for nonlocal firms, strong ties, and peers living in the same neighborhood. Survey evidence suggests social networks promote recruitment by providing information about firm fundamentals to potential applicants. Our results help rationalize why the majority of managers hold prior connections to the firm. |
| URL | https://academic.oup.com/rfs/article-abstract/35/1/207/6146360?redirectedFrom=fulltext |
| Tags | Archival Empirical | Manager / Firm Behavior | Social Network Structure |
Social interactions and households' flood insurance decisions
| Authors | Hu |
| Journal | Journal of Financial Economics |
| Year | 2022 |
| Type | Published Paper |
| Abstract | Flooding is the most costly natural disaster faced by US households, yet policymakers are puzzled by the low take-up rates for flood insurance. Leveraging novel transaction-level data, this paper studies the influence of social interactions on households' insurance decisions. I show that households increase flood insurance purchases by 1-5 percent when their geographically distant friends are exposed to flooding events or to campaigns for flood insurance. These exogenous shocks to far-away friends should not affect local households' own insurance decisions except through peer effects. I provide evidence suggesting that social interactions facilitate learning through information dissemination and attention triggering. |
| Keywords | Flood insurance, social learning, peer effects, social networks |
| URL | https://www.sciencedirect.com/science/article/pii/S0304405X22000563 |
| Tags | Archival Empirical | Consumer Decisions |
Cross-industry information sharing among colleagues and analyst research
| Authors | Huang, Lin, Zang |
| Journal | Journal of Accounting and Economics |
| Year | 2022 |
| Type | Published Paper |
| Abstract | We identify a specific organizational resource in brokerage houses--information sharing among analyst colleagues who cover economically related industries along a supply chain. After controlling for brokerage selection effects, we show evidence consistent with the benefit of this resource to analyst research performance. Specifically, we find that analysts whose colleagues cover more economically connected industries have better research performance, especially when their colleagues produce higher-quality research. We further show that colleagues' coverage of downstream (upstream) industries is positively related to the accuracy of only analysts' revenue (expense) forecasts and that analysts and their highly connected colleagues tend to issue earnings forecast revisions contemporaneously. Last, we find that analysts with economically connected colleagues tend to have a higher level of industry specialization. Overall, our findings suggest that analysts rely on organizational resources to produce high-quality research. Hence, a portion of their performance and reputation is not transferable across employers. |
| Keywords | Financial analyst, information sharing, economically connected industries, supply chain, analyst performance, industry specialization |
| URL | https://www.sciencedirect.com/science/article/pii/S0165410122000192 |
| Tags | Archival Empirical | Manager / Firm Behavior |
Can FinTech competition improve sell-side research quality?
| Authors | Jame, Markov, Wolfe |
| Journal | The Accounting Review |
| Year | 2022 |
| Type | Published Paper |
| Abstract | We examine how increased competition stemming from an innovation in financial technology influences sell-side analyst research quality. We find that firms added to Estimize, an open platform that crowdsources short-term earnings forecasts, experience a pervasive and substantial reduction in consensus bias and a limited increase in consensus accuracy relative to matched control firms. Long-term forecasts and investment recommendations remain similarly biased, alleviating the concern that the documented reduction in bias is a response to broad economic forces. At the individual analyst level, we find that bias reduction is more pronounced among close-to-management analysts, and that more biased analysts respond by reducing their coverage of Estimize firms. The collective evidence suggests that competition from Estimize improves sell-side research quality by discouraging strategic bias. |
| Keywords | Analysts, forecast bias, FinTech, crowdsourcing |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2915817 |
| Tags | Archival Empirical | Manager / Firm Behavior |
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 |
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 |
Media partisanship and fundamental corporate decisions
| Authors | Knill, Liu, McConnell |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2022 |
| Type | Published Paper |
| Abstract | Using the introduction of Fox News as a natural experiment, we investigate whether partisanship in television news coverage influences fundamental corporate decisions.We find that during the George W. Bush presidency, firms led by Republican-leaning managers headquartered in regions into which Fox was introduced shift upward their total investment expenditures and financial leverage. Our findings imply that in making fundamental corporate decisions, Republican-leaning managers are swayed by the Republican slant of Fox that presents an optimistic macroeconomic outlook. The results highlight the importance of heterogeneity in media slant in understanding the role of the media incorporate decision making. |
| Keywords | Media slant, partisanship, corporate decision-making |
| URL | https://www.cambridge.org/core/journals/journal-of-financial-and-quantitative-analysis/article/abs/media-partisanship-and-fundamental-corporate-decisions/0E3A5D1C6B5BC003B839D0E161AAE22D#access-block |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical | Manager / Firm Behavior | Media and Textual Analysis |
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 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 |
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 |