Meme Stocks and Individual Investor Trading: Evidence from Reddit Outages

Abstract

During exogenous outages of Reddit, the predictability of retail order imbalance on future stock returns for meme stocks (i.e., stocks discussed extremely enthusiastically in the subreddit wallstreetbets) increases dramatically. This result is robust to various model specifications. The improved predictability is stronger for stocks discussed more fanatically before the outages, especially when influencers endorse fanatic views. Our results suggest that trading meme stocks disadvantage individual investors as fanatic discussions disrupt their investment decisions. Our findings cannot be explained by the drop in attention on Reddit. The overall market quality, such as return volatility and stock liquidity, does not change significantly.

Keywords: Meme stocks, Retail investor, Social media, Behavioral biases

JEL Classification: G11, G14, G18, G41