The Good, the Bad, and the Social Media: Financial Implications of Social Media Reactions to Firm-Related News
Posted: 27 Apr 2020
Date Written: March 25, 2020
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.
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