Can Social Media Distort Price Discovery? Evidence from Merger Rumors
67 Pages Posted: 17 Jul 2017 Last revised: 13 Jul 2020
Date Written: July 3, 2020
Abstract
We study whether social media can play a negative information role by impeding price discovery in the presence of highly speculative rumors. We focus on merger rumors, where most do not materialize. We find that merger rumors accompanied by greater Twitter activity elicit greater immediate market reaction even though rumor-related Twitter activity is unrelated to the probability of merger realization. The price distortion associated with tweet volume persists weeks after a rumor and reverses only after eight weeks. The price distortion is more pronounced for rumors tweeted by Twitter users with greater social influence, for target firms with low institutional ownership, and for rumors that supply more details. Our evidence suggests that social media can be a rumor mill that hinders the market’s price discovery of potentially false information.
Keywords: social media, Twitter, rumor, merger rumor, media
JEL Classification: G14; G40, G41, M15; M40; M41
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