Social Media and Political Power: Their Impact on Financial Markets

Abstract

We investigate President Donald J. Trump’s unprecedented use of social media, notably Twitter, to attack, pressure, and compliment specific firms. Our results show that Trump is more likely to tweet firms from his business network, and firms that could help him in implementing or justifying his economic policy. Our study offers a setting for studying the impact of social media posts on the capital market when there is a change in political power. The findings provide new evidence showing that investors are more likely to react to social media posts released by an influential source; for example, the market’s reactions to Trump’s posts were significantly and economically stronger after he won the 2016 presidential election. Our results suggest that investors are very sophisticated in processing the relevance for firm value of information transmitted on social media.

Keywords: Twitter, Social Media, Political Connections, Event Study, Stock Price Reaction, Investor Sentiment

JEL Classification: G12, G14, P16