Social media’s all-encompassing influence has wreaked havoc on the world of finance. Silicon Valley Bank found itself in a crisis after a series of panicked tweets ignited a bank run in March 2023. Some analysts even compared the situation at SVB to the short squeeze of GameStop stock, which Reddit users organized on the site in January 2021. Both instances force all of us to consider how much movements and trends on online platforms influence markets.
In “Investor Disagreement, Disclosure Processing Costs, and Trading Volume: Evidence from Social Media,” Vernon Richardson, Adam Booker, and Asher Curtis study how investor disagreement and varying levels of processing costs affect trading volume on the investor-focused social network StockTwits. The researchers provide insight into how online interactions create market realities by determining how posts on social media affect financial ecosystems. Managers attempting to strengthen investors’ confidence in their enterprise can use these findings to establish safeguards and mitigate future disasters. Additionally, the research can provide understanding to investors shifting their focus toward online discourse.
When folks with differing opinions find themselves in a space together (physical, digital, or otherwise), they often state their views, defend their ideas and do their best to shut down nay-sayers. This interaction between conflicting opinion holders is called “disagreement.” Like anyone who knows anything about a subject, those who engage with the stock market have opinions: whether a company will perform better or worse, if a stock’s price is worth the risk, and so on. When investors and financial analysts share their opinions with others, they might find everyone doesn’t see the situation the same way they do.
Verbal disagreement can have astounding effects on trading volume. Previous research has shown a positive relationship between investor disagreement and increased trading volume. When experts, analysts, or retail investors argue about a stock, they tend to buy or sell it. The more they argue, the more they trade. Controversial events cause investors to argue even more. Companies releasing earnings announcements have a knack for triggering a lot of investor disagreement and, in turn, plenty of trading. Like clockwork, a company will release any information relative to earnings activities, and people will start talking, arguing, buying, and selling. Conversely, less discussion leads to decreased trading. The market is volatile on news-heavy days and relatively quiet when things are uneventful.
Barriers to informativeness also present themselves in the form of “processing costs.” Some players in the market have unequal access to companies’ earnings information. Analysts often assume firm disclosures are public information. Therefore, acquisition and analysis occur at no expense. However, nothing is free. All investors face costs that inhibit the acquisition and integration of earning information. Monitoring, attaining, and scrutinizing firm disclosures can be an expensive undertaking. Studying earning information costs investors time and effort, which often impedes awareness.
The presence of processing costs decreases trade volume by hindering investor disagreement. Investors can’t engage in disagreement if they have nothing to argue about. Processing costs and other barriers inhibiting the flow of information from a company to an investor lower the amount of potential disagreement. Absent these processing costs, disagreement and trade would skyrocket. Facts and prices would be readily available for anyone to form opinions about. While we do not find ourselves in a processing cost-less world, the internet has evened out the cards in most market players’ hands.
Online platforms have leveled the playing field for day traders and retail investors with unequal access to companies’ earnings information. While some investors still can work around processing costs and gain access to private information, social media allows users to share news, tips and rumors that might have once been privileged. For example, Stocktwits operates as the “Twitter for Investors.” The platform soared in popularity over recent years and now boasts 6 million registered users. Unlike other social networks, StockTwits users relay only trading-related information and opinions through short posts. Social media sites streamlined complex disagreements by allowing diverse investors to share information and opinions. Investors and analysts from various expertise operate on StockTwits, so users possess a wide range of background information which increases arguing on the platform.
These online arguments continue to prove the same as their traditional counterparts—if investors verbally disagree more, they trade more. Even though Stocktwits can’t wholly remove processing costs, the website has expedited the disagreement process. Users can whip out short posts that denote the stock and their opinion (bullish or bearish) with two small icons in the blink of an eye, while the associated trading occurs at a similar rate. Investors often fall into an online frenzy of buying and selling fueled by FOMO (fear of missing out) or autophobia (fear of being the last one out).
This shift in how disagreement occurs between investors has left the economy reeling more than once. Trading platforms have been shut down; the Federal Reserve has stepped in to support banks more than once. Company managers who previously had time to prepare before less-than-good news broke now must now react to market trends before they even start forming. Historically, information from earnings announcements slowly seeped into every corner of the market, and analysts usually delayed even longer dissecting the reports, deriving opinions from them.
Because of Stocktwits and similar online platforms, processing costs have lowered. Anyone can engage in informed disagreement and the subsequent buying or selling of securities. Investors and analysts come together in subreddits and Facebook groups to discuss and debate what economic choices are the safest or the most likely to flip the market.
With the knowledge of how online engagement affects disagreement, any party in the market can anticipate where energy is headed, prepare safeguards for their financial positions, and mitigate future disasters. Investors can stay up to date on social media to gauge the market potentiality of stocks, and corporate managers can do the same to try and smell smoke before a fire starts, so to speak.
Even with “meme-stocks” and “YOLO-stocks,” financial stability is possible. As research progresses and the literature about investor disagreement expands, Richardson, Booker, and Curtis’s study sheds new light on how a broad population of investors operates in an information-rich online setting.
Vernon RichardsonVernon J. Richardson is a distinguished professor in the Department of Accounting at the Sam M. Walton College of Business and holder of the G. William Glezen Endowed Chair in Accounting. He was recently awarded the Silver Medal of Honor from the University of Melbourne and CPA Australia as he delivered the 80th Annual University of Melbourne-CPA Australia Research Lecture. He also is co-author of two college-level accounting textbooks–Data Analytics for Accounting and Accounting Information Systems–and a third textbook Introduction to Data Analytics for Accounting is forthcoming.
Jack TravisJack Travis is pursuing an undergraduate degree in journalism at the University of Arkansas. Travis is the copy editor of the Arkansas Traveler and the treasurer of the UA chapter of the Society of Professional Journalists. He is interested in marketing and brand journalism.
Photo credit: https://walton.uark.edu/
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