The Good, the Bad, and the Social Media: Financial Implications of Social Media Reactions to Firm-Related News

Posted: 27 Apr 2020

See all articles by Jing Peng

Jing Peng

University of Connecticut - Department of Operations & Information Management

Juheng (Julie) Zhang

University of Massachusetts Lowell

Ram Gopal

University of Warwick

Date Written: March 25, 2020

Abstract

Firms and investors often react to financial news on social media. However, how they react to news of different nature and whether their reactions can influence the stock market are far from clear. Employing data of financial news, tweets posted by firms and investors, and daily stock prices, we examine how the tweeting intensities of firms and investors vary with the sentiment and uncertainty of financial news, as well as how the changes in their tweeting intensities affect stock returns. We use a simultaneous equations model with instruments to address potential endogeneity concerns. Our analysis reveals several interesting findings. First, firms are more responsive to news with positive sentiment and low uncertainty, whereas investors are more responsive to news with high uncertainty. Second, when the tweeting intensities of firms and investors increase, the stock returns of focal firms surge. Third, investors tweet more about smaller firms facing uncertain news and the increased volume of investor tweets, in turn, has a stronger effect on the stock returns of smaller firms. This paper heightens the overlooked role of uncertainty in financial news and provides a full picture of how news and social media reactions from firms and investors collectively influence stock returns.

Suggested Citation

Peng, Jing and Zhang, Juheng and Gopal, Ram, The Good, the Bad, and the Social Media: Financial Implications of Social Media Reactions to Firm-Related News (March 25, 2020). Available at SSRN: https://ssrn.com/abstract=3567201

Jing Peng (Contact Author)

University of Connecticut - Department of Operations & Information Management ( email )

368 Fairfield Road
Storrs, CT 06269-2041
United States

Juheng Zhang

University of Massachusetts Lowell ( email )

1 University Ave
Lowell, MA 01854
United States

Ram Gopal

University of Warwick ( email )

West Midlands, CV4 7AL
United Kingdom

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