Local Twitter Activity and Stock Returns

51 Pages Posted: 26 May 2016

See all articles by Bok Baik

Bok Baik

Seoul National University

Qing Cao

University of Houston-Downtown

Sunhwa Choi

Sungkyunkwan University

Jin-Mo Kim

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: May 24, 2016

Abstract

In this study, we use geographic proximity as a measure of private information and examine the informational role of social media in stock markets. Using a large sample of individual messages (tweets) collected from Twitter during the period July 2011–March 2012, we find that local Twitter users are more likely to tweet about firms with high information asymmetry, and their Twitter activity in turn increases the trading volume of local stocks. More importantly, we find that the negative tone of local tweets predicts future stock returns and subsequent earnings announcement returns, while nonlocal tweets present no such predictability. These results suggest that local social media activity reflects new information, contributing to price discovery. We also find that the negative tone of local tweets is associated with higher bid-ask spreads and lower market depths. This finding suggests that social media – in contrast to traditional news media, which reduce firms’ information asymmetry – serve to share information with an audience in their networks and therefore increase information asymmetry among investors. Overall, our findings suggest that local social media contain value-relevant information and affect firms’ information environments.

Keywords: Twitter; social media; textual analysis; geographic proximity; trading volume; stock return; information asymmetry

Suggested Citation

Baik, Bok and Cao, Qing and Choi, Sunhwa and Kim, Jin-Mo, Local Twitter Activity and Stock Returns (May 24, 2016). Available at SSRN: https://ssrn.com/abstract=2783670 or http://dx.doi.org/10.2139/ssrn.2783670

Bok Baik

Seoul National University ( email )

Seoul
Kwanak-gu
Seoul, 151-742
Korea, Republic of (South Korea)

Qing Cao

University of Houston-Downtown ( email )

Sunhwa Choi (Contact Author)

Sungkyunkwan University ( email )

Sunkyunkwan University Business School
25-2, Sungkyunkwan-ro, Jongno-gu
Seoul, 03063
Korea, Republic of (South Korea)

Jin-Mo Kim

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

Janice H. Levin Bldg., Room 121
94 Rockafeller Road
Piscataway, NJ 08854-8054
United States

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