Social Media and Financial News Manipulation

Abstract

We dissect an undercover SEC investigation into the manipulation of financial news on social media to study the indirect effects of market manipulation. While fraudulent news had a direct impact on retail trading and prices, revelation of the fraud caused market participants to discount all news, including legitimate news, from these platforms. The results highlight the indirect consequences of fraud and its spillover effects that reduce the social network’s impact on information dissemination, especially for small firms. The effect appears to dissipate over time, becoming insignificant a year later. The results highlight the importance of social capital for financial activity.