The Speed of Communication

55 Pages Posted: 1 Oct 2016 Last revised: 31 Jul 2018

See all articles by Shiyang Huang

Shiyang Huang

The University of Hong Kong - Faculty of Business and Economics

Byoung-Hyoun Hwang

Cornell University - Dyson School of Applied Economics and Management; Korea University - Department of Finance

Dong Lou

London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR)

Date Written: July 22, 2018

Abstract

We study how information travels in the financial marketplace via word-of-mouth communication. Our innovation is to use cross-industry stock-financed mergers and acquisitions (M&As) as a source of plausibly exogenous variation in an investor’s portfolio composition and subsequent information-gathering activity. Specifically, we conjecture that once endowed with shares of the acquirer firm, investors in the target firm pay greater attention to the acquirer firm’s industry, which, in turn, generates additional trading activity in the acquirer industry. To the extent that any newly gained industry perspective spreads through word-of-mouth communication, we may observe higher levels of trading activity in the acquirer industry not only by target investors but also by their neighbors and their neighbors’ neighbors. Our analysis supports and builds on this assumption and uses retail-investor-trading records to trace out the “contagion” of acquirer-industry trading to describe the rate at which information spreads in financial markets and how that rate varies with both characteristics of the underlying information and characteristics of the senders and receivers of such information. than the effective communication rate in the reverse direction.

Keywords: Social Interaction, Word-of-Mouth, Information Diffusion

JEL Classification: G11, G12, G14, G20

Suggested Citation

Huang, Shiyang and Hwang, Byoung-Hyoun and Lou, Dong, The Speed of Communication (July 22, 2018). 7th Miami Behavioral Finance Conference 2016. Available at SSRN: https://ssrn.com/abstract=2845843 or http://dx.doi.org/10.2139/ssrn.2845843

Shiyang Huang (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Byoung-Hyoun Hwang

Cornell University - Dyson School of Applied Economics and Management ( email )

Ithaca, NY
United States

HOME PAGE: http://www.bhwang.com

Korea University - Department of Finance

Seoul, 136-701
United States

Dong Lou

London School of Economics & Political Science (LSE) ( email )

Department of Finance
Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0)207 1075360 (Phone)

HOME PAGE: http://personal.lse.ac.uk/loud/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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