Social ties and peer effects in crowdfunding markets
| Authors | Peng, Zhang |
| Year | 2021 |
| Type | Working Paper |
| Abstract | We identify the crucial role social networks play in crowdfunding markets. Investors are 50% more likely to fund projects that their social network peers support and are 11.2% more likely to fund projects from regions to which they have strong social ties, given a one standard deviation change in the variables. Peer effects complement platform design choices and the effect of social ties, and social ties transmit information about economic conditions in project locations. Further, the investor-level effects aggregate and affect project funding successes. Our findings suggest that social networks increase investor awareness, disseminate information, and have real impacts on capital allocations. |
| Keywords | Social network, peer effects, social learning, fintech, crowdfunding, platform design |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3747375 |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Social Network Structure |
Partisan return gap: The polarized stock market in the time of a pandemic
| Authors | Sheng, Sun, Wang |
| Year | 2021 |
| Type | Working Paper |
| Abstract | Using two proxies for investors' political affiliation, we document sharp differences in stock returns between firms likely dominated by Democratic investors (blue stocks) and those dominated by Republican investors (red stocks) during the COVID pandemic. Red stocks have 20 basis points higher risk-adjusted returns than blue stocks on COVID news days (Partisan Return Gap). Lockdown policies, COVID cases, industry and firm fundamentals only explain at most 25% of the return gap. Polarized political beliefs about COVID, revealed through people's social distancing behaviors and their Stock-Twits, contribute to about 40% of the return gap beyond the fundamental channel. Our paper provides partisanship as a novel aspect in understanding abnormal stock returns during the pandemic. |
| Keywords | Partisanship, stock returns, pandemic, COVID-19, political polarization, political finance, social finance |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3809575 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) | Social Network Structure |
CEO partisan bias and management earnings forecast bias
| Authors | Stuart, Wang, Willis |
| Year | 2021 |
| Type | Working Paper |
| Abstract | Political science research finds that individuals exhibit partisan bias, which results in unduly favorable economic expectations when their partisanship aligns with that of the US president. We examine whether partisan bias is present in management earnings forecasts, where CEOs have strong incentives to provide high-quality forecasts. We find that firms with CEOs whose partisanship aligns with that of the US president issue more optimistically biased management earnings forecasts than CEOs whose partisanship is unknown or not aligned with that of the US president. Our results suggest that CEOs fall prey to partisan bias, which results in suboptimal forecasting behavior. In cross-sectional analyses, we find that this forecast over-optimism is attenuated when CEOs are of higher ability. Additionally, we find that investors fail to discount the news in forecasts issued by CEOs whose partisanship aligns with that of the US president and that post-forecast abnormal returns are lower for these firms. |
| Keywords | Political bias, cognitive bias, management earnings forecasts, voluntary disclosure |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2902088 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Manager / Firm Behavior |
Community membership and reciprocity in lending: Evidence from informal markets
| Authors | Tomy, Moerman |
| Year | 2021 |
| Type | Working Paper |
| Abstract | We study how wholesalers assess credit risk and extend trade credit to retailers in informal economies where market institutions, such as financial reporting systems, auditing, and courts, are nonexistent or function poorly. Using the setting of a large market in India, we find that community membership plays a strong role in the access to credit. Wholesalers are more likely to provide trade credit and to offer less restrictive credit terms to within-community retailers, and are more lenient when these retailers default. Our findings suggest that an indirect reciprocity mechanism explains within-community credit flows, as evidenced by wholesalers with low endowments, those with greater within-community information flows about them, and those facing income shocks being more likely to provide preferential lending to their community retailers. The importance of the indirect reciprocity mechanism is further supported by evidence on the help traders receive from their community members following the COVID-19-related income shock. |
| Keywords | Trade credit, informal economies, lending, reciprocity, India, Iewduh, community enforcement, asymmetric information |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3773160&dgcid=ejournal_htmlemail_chicago:booth:famamiller:working:paper:series_abstractlink |
| Tags | Archival Empirical | Theory |
Entrepreneurial spillovers across coworkers
| Authors | Wallskog |
| Year | 2021 |
| Type | Working Paper |
| Abstract | Using large-scale administrative data, I track the employment and entrepreneurship of over forty million Americans and investigate entrepreneurial spillovers across coworkers, based on the idea that individuals who start their own firms learn institutional knowledge and entrepreneurial skills that they may teach others. I find that an individual whose current coworkers have more prior entrepreneurship experience is more likely to become an entrepreneur themself within the next five years, and these spillovers are strongest among workers with similar jobs and demographics. Furthermore, an individual is more likely to become a successful entrepreneur if those coworkers were themselves successful entrepreneurs. To quantify the role of these spillovers, I build a structural model of entrepreneurship and learning and estimate that the aggregate entrepreneurship rate would be 10% lower in the absence of learning. |
| URL | https://wallskog.su.domains/files/wallskog_jmp.pdf |
| Tags | Archival Empirical | Manager / Firm Behavior | Productivity Spillovers |
Investor attention or investor sentiment: How does social media react to ESG?
| Authors | Zhang, Xu, Hong |
| Year | 2021 |
| 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, there still lacks a consensus on the underlying mechanism connecting ESG and firm value. We argue that ESG can impact firm value through two possible channels:investor attention and investor sentiment. Exploiting user-generated content from a popular online investment community (Seeking Alpha) and ESG ratings from a professional database (Sustainalytics), we run a fixed-effect panel regression and find an overall positive relationship between ESG ratings and investor attention but no relationship between ESG ratings and investor sentiment. We then conduct an event-study analysis, in which we classify changes in ESG ratings as upgrade events and downgrade events and find that the significant relationship between ESG and investor attention still holds for the downgrade events but not for the upgrade ones. We 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 ratings 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 channel through which ESG affects firm value in the age of social media. |
| Keywords | ESG, investor attention, investor sentiment, social media, online investment communities |
| URL | https://ssrn.com/abstract=3905195 |
| Tags | Archival Empirical | Media and Textual Analysis |
Social networks and credit supply and demand
| Authors | Allen, Peng, Shan |
| Year | 2020 |
| Type | Working Paper |
| Abstract | Social networks are associated with the demand for and supply of consumer and small business loans originated on lending marketplaces. Loan demand increases substantially with past borrowing activities of geographically distant but socially connected areas, with an elasticity of 0.21. Borrower-area social proximity to deposits increases funding likelihood by 5.61% and improves ex-post loan performance. We establish causality with granular instrumental variables obtained from natural disasters (demand-side) and financial adviser misconduct (supply-side). The results suggest social networks improve capital allocation by increasing the awareness of alternative lending platforms and facilitating the transmission of less accessible information complementary to loan-specific data. |
| Keywords | Social network, online lending marketplaces, credit demand and supply, information transmission |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3537714 |
| Tags | Archival Empirical | Consumer Decisions | Financing- and Investment Decisions (Individual) | Social Network Structure |
Harnessing the wisdom of crowds
| Authors | Da, Huang |
| Journal | Management Science |
| Year | 2020 |
| Type | Published Paper |
| Abstract | When will a large group provide an accurate answer to a question involving quantity estimation? We empirically examine this question on a crowd-based corporate earnings forecast platform (Estimize.com). By tracking user activities, we monitor the amount of public information a user views before making an earnings forecast. We find that the more public information users view, the less weight they put on their own private information. Although this improves the accuracy of individual forecasts, it reduces the accuracy of the group consensus forecast because useful private information is prevented from entering the consensus. To address endogeneity concerns related to a user's information acquisition choice, we collaborate with Estimize.com to run experiments that restrict the information available to randomly selected stocks and users. The experiments confirm that "independent" forecasts result in a more accurate consensus. Estimize.com was convinced to switch to a "blind" platform from November 2015 on. The findings suggest that the wisdom of crowds can be better harnessed by encouraging independent voices from among group members and that more public information disclosure may not always improve group decision making. |
| Keywords | Wisdom of crowds, herding, naive learning, social learning, group decision making, earnings forecast |
| URL | https://pubsonline.informs.org/doi/10.1287/mnsc.2019.3294 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Social Network Structure |
Financial literacy externalities
| Authors | Haliassos, Karabulut, Jansson |
| Journal | Review of Financial Studies |
| Year | 2020 |
| Type | Published Paper |
| Abstract | This paper uses unique administrative data and a quasi-field experiment of exogenous allocation to apartments in Sweden to estimate medium- and longer-run effects on financial behavior from exposure to financially literate neighbors. It contributes evidence of causal impact of financial literacy and points to a social multiplier of effective programs to enhance it. Exposure promotes saving in private retirement accounts and stockholding, especially when neighbors have economics or business education, but only for educated or male-headed households. Findings point to relevant knowledge transfer through social interactions rather than to labor market or other channels linked to local economic conditions. |
| URL | https://doi.org/10.1093/rfs/hhz076 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) |
Presidential address: Social transmission bias in economics and finance
| Authors | Hirshleifer |
| Journal | Journal of Finance |
| Year | 2020 |
| Type | Published Paper |
| Abstract | I discuss a new intellectual paradigm, social economics and finance--the study of the social processes that shape economic thinking and behavior. This emerging field recognizes that people observe and talk to each other. A key, underexploited building block of social economics and finance is social transmission bias: systematic directional shift in signals or ideas induced by social transactions. I use five "fables" (models) to illustrate the novelty and scope of the transmission bias approach, and offer several emergent themes. For example, social transmission bias compounds recursively, which can help explain booms, bubbles, return anomalies, and swings in economic sentiment. |
| Keywords | Social transmission bias, social economics, social finance, behavioral economics, behavioral finance, social networks, social learning, information percolation, biased percolation, epidemiology, visibility bias, self-enhancing transmission bias, simplistic thinking, memes, cultural evolution |
| URL | https://onlinelibrary.wiley.com/doi/pdf/10.1111/jofi.12906 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Evolutionary Finance | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) | Manager / Firm Behavior | Media and Textual Analysis | Propagation of Noise / Undesirable Outcomes | Social Transmission Biases | Theory |
Networks: an economic perspective
| Authors | Jackson, Rogers, Zenou |
| Book | Oxford Handbook of Social Network Analysis |
| Year | 2020 |
| Type | Book | Literature Review Paper |
| Abstract | We discuss social network analysis from the perspective of economics. We organize the presentation around the theme of externalities: the effects that one's behavior has on others' welfare. Externalities underlie the interdependencies that make networks interesting to social scientists. We discuss network formation, as well as interactions between peoples' behaviors within a given network, and the implications in a variety of settings. Finally, we highlight some empirical challenges inherent in the statistical analysis of network-based data. |
| Keywords | economic networks, externalities, game theory, network formation, network games, networks, peer effects, social networks |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2827341 |
| Tags | Archival Empirical | Social Network Structure |
Can social media distort price discovery? Evidence from merger rumors
| Authors | Jia, Redigolo, Shu, Zhao |
| Journal | Journal of Accounting and Economics |
| Year | 2020 |
| Type | Published Paper |
| Abstract | We study whether social media can play a negative information role by impeding price discovery in the presence of highly speculative rumors. We focus on merger rumors, where most do not materialize. We find that merger rumors accompanied by greater Twitter activity elicit greater immediate market reaction even though rumor-related Twitter activity is unrelated to the probability of merger realization. The price distortion associated with tweet volume persists weeks after a rumor and reverses only after eight weeks. The price distortion is more pronounced for rumors tweeted by Twitter users with greater social influence, for target firms with low institutional ownership, and for rumors that supply more details. Our evidence suggests that social media can be a rumor mill that hinders the market's price discovery of potentially false information. |
| Keywords | Social media, Twitter, merger and acquisition, rumor, merger rumor, persuasion bias |
| URL | https://econpapers.repec.org/article/eeejaecon/v_3a70_3ay_3a2020_3ai_3a1_3as0165410120300367.htm |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Propagation of Noise / Undesirable Outcomes |
Biased information transmission in investor social networks: Evidence from professional traders
| Authors | Lim, Lane, Uzzi |
| Journal | Academy of Management Annual Meeting Proceedings |
| Year | 2020 |
| Type | Published Paper |
| Abstract | This research examines how the positive or negative valence of proprietary information affects both the likelihood that people diffuse this information through their social networks and the likelihood that recipients' access to this information provides them with a source of comparative advantage. Using a unique dataset of over 2 million stock trades and associated profits and losses, and 1 million instant messages exchanged between professional day traders at a U.S. hedge fund, we show that day traders are more likely to talk about their gains than their losses with their close contacts, suggesting that positive information is more likely to be shared among one's close network of strong ties. However, by examining the subsequent behaviors of message recipients, we find that recipients tend to discount the value of positive, gains related information, being both more likely to pass on and profit from negative information related to trading losses, particularly from their strong ties. Our results suggest that although individuals are more likely to share positive information with their contacts, message recipients appear to account for the asymmetry in their subsequent communications and decision-making. |
| URL | https://journals.aom.org/doi/10.5465/AMBPP.2020.18198abstract |
| Tags | Archival Empirical | Investment Decisions (Institutional) | Social Transmission Biases |
Investing in low-trust countries: On the role of social trust in the global mutual fund industry
| Authors | Massa, Wang, Zhang, Zhang |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2020 |
| Type | Published Paper |
| Abstract | We hypothesize that social trust, in mitigating contracting incompleteness, may have an important effect on the activeness and effectiveness of delegated portfolio management. Using a complete sample of worldwide open-end mutual funds, we find that trust is positively associated with the activeness of funds and that trust-related active share delivers superior performance (e.g., approximately 2% per year for cross-border investments). Moreover, "trust in the market" and "trust in managers" play important yet different roles for different types of cross-border delegated portfolio management. Our results suggest that trust acts as a fundamental building block for delegated portfolio management. |
| Keywords | Social trust, portfolio management, mutual fund, contracting relationship |
| URL | https://doi.org/10.1017/S0022109020000848 |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical | Investment Decisions (Institutional) |
Foreign-born resident networks and stock comovement: When local bias meets home (country) bias
| Authors | Meng, Pantzalis |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2020 |
| Type | Published Paper |
| Abstract | Foreign migration flows have important stock market consequences. Foreign-born resident networks within U.S. Metropolitan Statistical Areas (MSAs) are associated with excess return comovement between locally headquartered stocks and American Depositary Receipts (ADRs) from countries with ties to the MSA through the network of foreign-born residents. This comovement is hardly due to correlated fundamentals and at least partially driven by correlated trading within members of a common investor base consisting of foreign-born residents. Our evidence has implications for both investors and foreign multinational corporations (MNCs) seeking to reap benefits from cross-listings and is consistent with the notion that foreign-born residents exhibit both local bias and home (country) bias. |
| Keywords | Foreign migration, social networks, stock price behavior, international diversification |
| URL | https://doi.org/10.1017/S0022109020000976 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Social Network Structure |
Social collateral
| Authors | Nguyen, Dang |
| Year | 2020 |
| Type | Working Paper |
| Abstract | This paper studies the role of social stigma in debt repayment decisions, using a randomized field experiment with the borrowers of a retail bank. In our experiment, borrowers are randomly chosen to have their repayment status shared with an observer who is also randomly selected from a pre-existing list of the borrower's social connections. First, we find that receiving the social disclosure treatment significantly reduces delinquency, by 20% of the base rate. Second, estimates from the benchmarking treatments indicate that borrowers are willing to pay 9% of their monthly income to preserve their social image, not significantly less than they would pay to maintain a good credit report. Third, we combine the random variation in the assigned social contexts with heterogeneity in subject characteristics to examine why borrowers respond to reputational incentives. We find that borrowers are concerned that the revelation of delinquency can make them a less attractive match in social interactions such as in the labor market or the marriage market, i.e., the instrumental role of reputation. Our findings highlight the role of social social collateral as an alternative mechanism to enforce lending contracts and expand credit provision. |
| Keywords | Bank borrowing, social disclosure, reputational costs, debt repayment decision, social networks |
| URL | https://finance.darden.virginia.edu/wp-content/uploads/2020/08/Social-Collateral_062020.pdf |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Social Network Structure |
Social networks, reputation, and commitment: Evidence from a savings monitors experiment
| Authors | Breza, Chandrasekhar |
| Journal | Econometrica |
| Year | 2019 |
| Type | Published Paper |
| Abstract | We conduct an experiment to study whether individuals save more when information about the progress toward their self-set savings goal is shared with another village member (a "monitor"). We develop a reputational framework to explore how a monitor's effectiveness depends on her network position. Savers who care about whether others perceive them as responsible should save more with central monitors, who more widely disseminate information, and proximate monitors, who pass information to individuals with whom the saver interacts frequently. We randomly assign monitors to savers and find that monitors on average increase savings by 36%. Consistent with the framework, more central and proximate monitors lead to larger increases in savings. Moreover, information flows through the network, with 63% of monitors telling others about the saver's progress. Fifteen months after the conclusion of the experiment, other villagers have updated their beliefs about the saver's responsibility in response to the intervention. |
| Keywords | Commitment, reputation, savings, social networks. |
| URL | https://onlinelibrary.wiley.com/doi/abs/10.3982/ECTA13683 |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Social Network Structure |
Crowdsourcing financial information to change spending behavior
| Authors | D'Acunto, Rossi, Weber |
| Year | 2019 |
| Type | Working Paper |
| Abstract | We document five effects of providing individuals with crowdsourced spending information about their peers (individuals with similar characteristics) through a FinTech app. First, users who spend more than their peers reduce their spending significantly, whereas users who spend less keep constant or increase their spending. Second, users' distance from their peers' spending affects the reaction monotonically in both directions. Third, users' reaction is asymmetric - spending cuts are three times as large as increases. Fourth, lower-income users react more than others. Fifth, discretionary spending drives the reaction in both directions and especially cash withdrawals, which are commonly used for incidental expenses and anonymous transactions. We argue Bayesian updating, peer pressure, or the fact that bad news looms more than (equally-sized) good news cannot alone explain all these facts. |
| Keywords | FinTech, learning, beliefs and expectations, peer pressure, financial decision-making, saving, consumer finance |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3348722 |
| Tags | Archival Empirical | Consumer Decisions | Financing- and Investment Decisions (Individual) | Social Network Structure |
The relevance of broker networks for information diffusion in the stock market
| Authors | Di Maggio, Franzoni, Kermani, Sommavilla |
| Journal | Journal of Financial Economics |
| Year | 2019 |
| Type | Published Paper |
| Abstract | This paper shows that the network of relationships between brokers and institutional investors shapes information diffusion in the stock market. Central brokers gather information by executing informed trades, which is then leaked to their best clients. After large informed trades, other institutional investors are significantly more likely to execute similar trades through the same broker, allowing them to capture returns that are twice as large as their normal trading performance. Also indicative of information leakage, the clients of the broker employed by activist investors to execute their trades buy the same stocks just before the filing of the 13D. |
| URL | https://www.sciencedirect.com/science/article/abs/pii/S0304405X1930087X |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Investment Decisions (Institutional) | Social Network Structure |
Active trading and (poor) performance: The social transmission channel
| Authors | Escobar, Pedraza |
| Year | 2019 |
| Type | Working Paper |
| Abstract | Individuals often invest actively and generate inferior returns. Social interactions might exacerbate this tendency, but the causal effect from peer effects on active trading are difficult to identify empirically. This paper exploits the exogenous assignment of students to classrooms in a large-scale financial education initiative to evaluate the transmission of trading strategies among individual investors. The paper shows that favorable peer returns on single-stock transactions stimulate market entry among inexperienced investors, even when total portfolio performance among peers is negative. The results are consistent with selective communication: individuals with trading background share their most favorable trades, which attracts others to the stock market. Inexperienced individuals who are exposed to peers with large returns on single trades appear to overestimate the value of active trading. The paper finds that these rookie investors make more stock transactions, trade more speculatively, but also generate inferior returns. The findings show the strength of social communication as a key determinant of financial decision making. |
| Keywords | Stock market participation, peer effects, active trading |
| URL | http://hdl.handle.net/10986/31361 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) | Propagation of Noise / Undesirable Outcomes | Social Transmission Biases |