Social Media Effect, Investor Recognition and the Cross-Section of Stock Returns

46 Pages Posted: 13 Dec 2019

See all articles by Meng Xiangtong

Meng Xiangtong

Tianjin University - College of Management and Economics

Wei Zhang

Tianjin University - College of Management and Economics

Youwei Li

Hull University Business School

Xing Cao

Tianjin University - College of Management and Economics

Xu Feng

Tianjin University - College of Management and Economics

Date Written: November 26, 2019

Abstract

Investor recognition affects cross-sectional stock returns. In informationally incomplete markets, investors have limited recognition of all securities, and their holding of stocks with low recognition requires compensation for being imperfectly diversified. Using the number of posts on the Chinese social media platform Guba to measure investor recognition of stocks, this paper provides a direct test of Merton's investor recognition hypothesis. We find a significant social media premium in the Chinese stock market. We further find that including a social media factor based on this premium significantly improves the explanatory power of Fama-French factor models of cross-sectional stock returns, and these results are robust when we control for the mass media effect and liquidity effect. Finally, we find that investment strategies based on the social media factor earn sizable risk-adjusted returns, which signifies the importance of the social media premium in portfolio management.

Keywords: social media, investor recognition, asset pricing

JEL Classification: G12, G14, G15

Suggested Citation

Xiangtong, Meng and Zhang, Wei and Li, Youwei and Cao, Xing and Feng, Xu, Social Media Effect, Investor Recognition and the Cross-Section of Stock Returns (November 26, 2019). International Review of Financial Analysis, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3493676 or http://dx.doi.org/10.2139/ssrn.3493676

Meng Xiangtong

Tianjin University - College of Management and Economics ( email )

NO.92 Weijin Road
Nankai District
Tianjin, 300072
China

Wei Zhang

Tianjin University - College of Management and Economics ( email )

Tianjin
China

Youwei Li

Hull University Business School ( email )

University of Hull
Hull, HU6 7RX
United Kingdom

Xing Cao

Tianjin University - College of Management and Economics ( email )

NO.92 Weijin Road
Nankai District
Tianjin, 300072
China

Xu Feng (Contact Author)

Tianjin University - College of Management and Economics ( email )

NO.92 Weijin Road
Nankai District
Tianjin, 300072
China

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