Should Investors Consider the Sentiment of Online Discussions? An Analysis of the Link between Fundamental Information, Social Media Sentiment and the Stock Market

Abstract

This research analyses the link between fundamental information, social media sentiment, and stock returns from 2010 to 2018. We are interested in whether social media sentiment provides additional information to already published fundamental information, such as financial information and analysts forecasts. Therefore, we explore the relationship between fundamental information and sentiment. We find that unexpected earnings, analyst forecast revisions, new dividends, and 8-K filings have a significant impact on sentiment. We introduce the adjusted social media sentiment, which corrects social media sentiment for the impact of this fundamental information. It turns out that adjusted social media sentiment is related to the subsequent stock returns. Moreover, most of social media sentiment's total effect emerges from adjusted sentiment. In particular, stocks with negative sentiment tend to have negative subsequent short-term returns. It is, thus, important to distinguish between positive and negative sentiment. Subsequent long-term returns are more mildly affected suggesting that the impact of negative sentiment seems to be permanent.

Keywords: Return Predictability, Fundamental Information, Wisdom of Crowds, Investor Sentiment, Social Media

JEL Classification: G12, G14, G40