The Internet as an Information Intermediary

Abstract

The internet is an enormous and growing source of information for investors about the opinions of others. Virtually any individual with internet access can express opinions about firms and editorialize about company news. However, to date we know very little about the impact these non-traditional internet intermediaries have on markets. We develop a framework wherein internet information intermediaries fall along a spectrum of professionalism and document a nuanced relationship between coverage by these intermediaries and capital market effects. Using a novel dataset that tracks coverage of companies by individuals posting on thousands of websites, we find that coverage by professional and semi-professional intermediaries is associated with positive capital market effects, but coverage by non-professional internet intermediaries has the opposite effect – hindering price formation. The detrimental effects of non-professional coverage are observed most strongly when the intermediaries have a larger audience. Collectively, these results provide important new insights into the internet’s role as an information intermediary.

Keywords: information dissemination, internet, web coverage, price formation, earnings announcements