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Customers as Advisor: The Role of Social Media in Financial Markets

Byoung-Hyoun Hwang, Perdue University, Indiana

25th May 2012  11:30 am - 12:30 pm Room 214/215, H69 - Economics and Business Building

This paper investigates the extent to which peer-based advice transmitted through social media affects the stock market. We conduct textual analysis of articles published on Seeking Alpha, a popular social-media platform among investors. We find that the views expressed in these articles associate strongly with contemporaneous and subsequent stock returns, and help predict earnings surprises. The social media effect is stronger for articles that receive more attention and for companies likely to be neglected by traditional advice sources. The association remains strong for companies with no mentioning in the Dow Jones News Service in the week surrounding the publication of the Seeking Alpha article. Together, these findings point to the importance of social media as both a source of peer-based advice and a channel through which views become reflected in stock prices.