When Crowds Aren't Wise: Biased Social Networks and its Price Impact
47 Pages Posted: 16 May 2023
Date Written: May 6, 2023
Abstract
Information production from investment social networks around earnings announcements matters to price efficiency. Social networks' content is excessively optimistic and associated with buying pressure before announcements. Such pressure deviates prices away from fundamentals before negative news and towards fundamentals before positive news. In rare cases of extreme pessimism, we find selling price pressure before positive and negative earnings news. Surges in retail trading and investors' beliefs susceptible to manipulation amplify these effects. Our results suggest that social networks induce optimistic trading, consistent with a model of wishful thinking.
Keywords: attention, earnings announcements, price efficiency, price impact, retail trading, social networks, Stocktwits, Seeking Alpha, WallStreetBets, wishful thinking
JEL Classification: E50, G12, G14
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