Wisdom of Crowds Before the 2007-2009 Global Financial Crisis
46 Pages Posted: 22 Apr 2020
Date Written: March 28, 2020
Our paper examines whether investor opinions expressed in social media predicted stock returns of financial firms during the 2007-2009 global financial crisis. We conduct a textual analysis of the articles published on the stock market insight website Seeking Alpha before the crisis and find that banks that were described in articles with a higher fraction of negative words experienced:
(1) sharper drops in stock prices,
(2) larger increases in expected default probability, and
(3) greater surges in nonperforming loans during the crisis.
Our evidence suggests that wisdom of crowds provides valuable information on how banks weather a forthcoming crisis.
Keywords: Social Media; Textual Analysis; Financial Crisis; Predictability; Seeking Alpha
JEL Classification: G01; G14; G17; G21
Suggested Citation: Suggested Citation