The Rise of Reddit: How Social Media Affects Retail Investors and Short-sellers’ Roles in Price Discovery

66 Pages Posted: 2 Apr 2021 Last revised: 30 Aug 2021

Date Written: March 14, 2021

Abstract

Using 2020-2021 data from social media platform Reddit, we examine connections among stock
prices, retail trading, short-selling and social media activity. Higher Reddit traffic, more positive
tone, and higher Reddit connectedness predict higher returns, greater and more positive retail order
flow, and lower shorting flows the next day. Social media information content is distinct from
retail order and shorting information content. Higher Reddit traffic, more positive tone, more
disagreement and higher Reddit connectedness increase shorting flow’s information content.
Robinhood 50 stocks are more affected by social media activity, with stronger links among retail
order flow, shorting flows and future returns.

Keywords: social media, short selling, intraday trading, retail investors

JEL Classification: G11, G12, G14, G23

Suggested Citation

Hu, Danqi and Jones, Charles M. and Zhang, Valerie and Zhang, Xiaoyan, The Rise of Reddit: How Social Media Affects Retail Investors and Short-sellers’ Roles in Price Discovery (March 14, 2021). Available at SSRN: https://ssrn.com/abstract=3807655 or http://dx.doi.org/10.2139/ssrn.3807655

Danqi Hu (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2211 campus drive
EVANSTON, IL 60208
United States

Charles M. Jones

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Valerie Zhang

Northwestern University

2001 Sheridan Road
Evanston, IL 60208
United States

Xiaoyan Zhang

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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