Do Individual Investors Understand How Social Media Advice Influences Their Investment Decisions?

51 Pages Posted: 15 May 2017 Last revised: 30 Jun 2019

See all articles by Kathryn Kadous

Kathryn Kadous

Emory University - Goizueta Business School

Molly Mercer

DePaul University

Yuepin (Daniel) Zhou

University of Illinois at Urbana-Champaign - Department of Accountancy

Date Written: June 17, 2019

Abstract

Individual investors increasingly rely on investment advice from social media platforms. Even advice with little, if any, predictive value appears to influence investor decisions. Our study reports the results of two experiments that help explain why investors rely on such advice. We find that some investors rely on advice with low predictive value because they believe that the advice is informative. However, other investors who rely on the advice are unaware of its influence on their investment decisions. Specifically, we find that sentiment-only social media advice influences investment decisions even among investors who believe that the advice should not and does not affect their decisions. Further, we find that investors rely equally on advice that conveys only sentiment and advice that conveys information about firm fundamentals, despite these same investors indicating that they should and did rely more on fundamentals-related advice. Our research suggests that regulators’ approach of asking investors to evaluate the credibility of the source is inadequate. To avoid being influenced by low quality information, investors need to avoid it entirely.

Keywords: social media; sentiment; fundamentals; source credibility; tone

Suggested Citation

Kadous, Kathryn and Mercer, Molly and Zhou, Yuepin, Do Individual Investors Understand How Social Media Advice Influences Their Investment Decisions? (June 17, 2019). Available at SSRN: https://ssrn.com/abstract=2968407 or http://dx.doi.org/10.2139/ssrn.2968407

Kathryn Kadous

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States
404-727-4967 (Phone)

Molly Mercer (Contact Author)

DePaul University ( email )

1 E Jackson Blvd Suite 6000
Chicago, IL 60604
United States
(312)362-8956 (Phone)

Yuepin Zhou

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

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