Social Media and Short Sellers

Abstract

Social media could be used to correct mispricing, or exacerbate it. We find evidence of the latter effect. Social media tone exhibits a “pump-and-dump” pattern around short selling that is not explained by traditional media tone. The combination of pump-and-dump social media tone and short interest is associated with a pump-and-dump pattern in stock prices that is not explained by actual news. Using the firm-by-firm introduction and temporary suspension of short selling in China as natural experiments, we find that social media tone increases and becomes more intense when short selling is allowed, suggesting short sellers may play a role in social media manipulation. Manipulative social media tone is greater when there are more posts from active social media users, who are perhaps better able to influence other users. Our findings suggest that social media can enable stock price manipulation.

Keywords: short selling, social media, manipulation, arbitrage

JEL Classification: G02, G11, G12, G14, G18