Innocuous Noise? Social Media and Asset Prices
Abstract
This paper shows that intense discussion on the Reddit social-media platform increases noise-trader risk for informed investors, resulting in lower price informativeness about earnings and delayed mispricing correction. Increased social discussion is associated with a decreased magnitude of pre-earnings-announcement drift, increased earnings-response coefficients, and a sizeable return reversal, demonstrating the decline in price informativeness around earnings announcement dates. In addition, stock prices of firms with high social discussion incorporate future earnings news more slowly. Social discussion leads to a decrease in trading activity by informed investors, such as hedge funds and short sellers. Consequently, social discussion results in delayed price correction of well-documented anomalies for up to two months; a corresponding trading strategy earns about 1.4% monthly. The main findings are corroborated using a matched sample. The findings suggest that intense social discussion reduces the production of value-relevant information.