Wisdom of the Crowd and Stock Price Crash Risk: Evidence from Social Media Activity of Investors
Presentation
Overview
Overview
Description
In this study, we investigate whether the social media activity of investors affects future stock price crash risk. A stock price crash occurs when managers hoard bad news over an extended period and disclose all of the bad news at once. We use the Stocktwits data to measure the social media activity of investors. Our results suggest that future stock price crash risk is lower with increased social media activity, as social media generates information and limits managers’ ability to hoard bad news. The results are robust even after we address potential endogeneity issues and continue to hold when we use firm fixed effects, two-stage least squares regression, and change analysis. The cross-sectional analyses suggest that the effect of social media is stronger when information environment and accounting quality is lower, further supporting the hoarding aversion effect. The results also suggest that social media serves as external monitoring mechanism. The results continue to hold even after we control for alternative information acquisition channels, such as the Google search volume index or SEC EDGAR database.
