Social Networks, Trading, and Liquidity

31 Pages Posted: 6 May 2022

See all articles by Lin Peng

Lin Peng

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Qiguang Wang

Hong Kong Baptist University (HKBU)

Dexin Zhou

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Date Written: May 2, 2022

Abstract

The recent meme stock saga has drawn attention to the growing role of social networks in capital markets. In this paper, the authors summarize the latest research that uses large scale, representative, real-world social network data to study social networks' influences on trading, liquidity, and valuations of stocks. Institutional investors invest more heavily in stocks if there are strong social ties between the geographic locations of the institution's headquarters and the firm's headquarters. Further, a firm's social ties to large institutional investors reduce its cost of capital, increase its valuation, and strengthen its liquidity. Social networks help to timely disseminate important news releases into prices, but also trigger belief divergence and generate persistent excess trading. Moreover, social interactions can amplify investors' behavioral biases and contribute to retail investors' attraction to lottery-type stocks. The authors provide additional examples to further illustrate why the roles of social networks are of particular importance to market participants.

Keywords: social networks, market liquidity

JEL Classification: G14, G02

Suggested Citation

Peng, Lin and Wang, Qiguang and Zhou, Dexin, Social Networks, Trading, and Liquidity (May 2, 2022). Available at SSRN: https://ssrn.com/abstract=4099114 or http://dx.doi.org/10.2139/ssrn.4099114

Lin Peng (Contact Author)

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States

Qiguang Wang

Hong Kong Baptist University (HKBU) ( email )

Department of Economics
Kowloon, Hong Kong
Hong Kong

Dexin Zhou

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

55 Lexington Avenue
New York, NY 10010
United States

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