“Wisdom of Crowds: The Value of Stock Opinions Transmitted Through Social Media” Chen, Hailiang, Prabuddha De, Yu Hu, and Byoung-Hyoun Hwang Flashcards
What is the main idea?
“This paper investigates the extent to which investor opinions transmitted through social media predict future stock returns and earning surprises. [..] We find that the views expressed in both - articles and commentaries - predict future stock returns and earning surprises.”
What is the methodology used?
Seeking Alpha (SA) – one of the biggest investment-related social media websites in USA; provides opinion and analysis, written by investors.
The authors introduce here Earnings surprise – the difference between the reported earnings-per-share (EPS) and the average of financial analysts’ EPS forecasts issued/updated within 30 days prior to the earnings announcement.
DATA: 7000 companies, 2005–2012, articles & comments: data from SA articles, only those about 1 stock, 460 000 comments written in first 2 days after article publication; determine negative words; regression.
What do the emergence of social media platforms and subsequent “creation and consumption of UGC” result in?
The emergence of social media platforms and subsequent “creation and consumption of user- generated content” result in consumers turning to fellow customers when choosing among products instead of relying on expert advice.
What is the impact of the fraction of negative words in SA articles and comments?
Fraction of negative words in SA articles and comments:
o Negatively predicts stock returns over the next 3 months (Interpretation: opinions contain value-relevant info, which wasn’t in the price before, SA views cause naïve investor reaction)
o Strongly predict subsequent scaled earnings surprises (the opinions expressed in SA articles and comments indeed provide value-relevant information)
Who do followers agree/disagree with more?
The nr of page views and the nr of times an article is read-to-end increase with the author’s historical level of consistency – followers can recognize authors that offer historically good advice, they get more popular
Followers disagree more with inconsistent (quality inconsistency) authors (In these cases, the comments are better predictors of stock market performance)
What are the incentives of truly informed users to share their insights?
o Users get value from the attention/recognition when their opinions are confirmed by the stock market
o Monetary compensation: SA contributor earns $10 per 1000-page views that his/her article receives
o Immediate and public feedback: Social media platforms allow users to directly interact and provide immediate public feedback on the author’s view of the company – bad articles get corrected
o Convergence to fundamental value: if SA users have some price impact they can speed up the convergence of market prices to what authors perceive to be the fair fundamental value
Why is this paper important?
First paper to find that stock returns can be predicted based on analysis/opinions on the internet.
