When Crowds Aren't Wise: Biased Social Networks and its Price Impact

47 Pages Posted: 16 May 2023

See all articles by Edna Lopez Avila

Edna Lopez Avila

University of Toronto - Rotman School of Management

Charles Martineau

University of Toronto - Rotman School of Management and UTSC Management

Jordi Mondria

University of Toronto - Department of Economics

Date Written: May 6, 2023

Abstract

Information production from investment social networks around earnings announcements matters to price efficiency. Social networks' content is excessively optimistic and associated with buying pressure before announcements. Such pressure deviates prices away from fundamentals before negative news and towards fundamentals before positive news. In rare cases of extreme pessimism, we find selling price pressure before positive and negative earnings news. Surges in retail trading and investors' beliefs susceptible to manipulation amplify these effects. Our results suggest that social networks induce optimistic trading, consistent with a model of wishful thinking.

Keywords: attention, earnings announcements, price efficiency, price impact, retail trading, social networks, Stocktwits, Seeking Alpha, WallStreetBets, wishful thinking

JEL Classification: E50, G12, G14

Suggested Citation

Lopez Avila, Edna and Martineau, Charles and Mondria, Jordi, When Crowds Aren't Wise: Biased Social Networks and its Price Impact (May 6, 2023). Available at SSRN: https://ssrn.com/abstract=4439793 or http://dx.doi.org/10.2139/ssrn.4439793

Edna Lopez Avila

University of Toronto - Rotman School of Management ( email )

Toronto, Ontario M5S 3E6
Canada

Charles Martineau (Contact Author)

University of Toronto - Rotman School of Management and UTSC Management ( email )

105 St-George
Toronto, Ontario M5S3E6
Canada

HOME PAGE: http://charlesmartineau.com

Jordi Mondria

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S 3G7
Canada
1-416-978-1494 (Phone)

HOME PAGE: http://individual.utoronto.ca/jmondria/

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