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Wisdom of the crowd and stock price crash risk: evidence from social media

Author

Listed:
  • Md Miran Hossain

    (University of North Carolina Wilmington)

  • Babak Mammadov

    (Clemson University)

  • Hamid Vakilzadeh

    (University of Wisconsin Whitewater)

Abstract

In this study, we investigate the impact of social media on future stock price crash risk. A stock price crash occurs when managers hoard bad news over an extended period and disclose all the bad news at once. Using Stocktwits data, we calculate informed tweets measure, which is the number of tweets with hyperlinks to original source of information divided by the total number of tweets. Our results demonstrate that future stock price crash risk is lower when the proportion of informed tweets is higher, suggesting that informed tweets on social media disseminate information and limit managers’ ability to hoard bad news. The results continue to hold when we address potential endogeneity issues using two-stage least squares regression, change analysis, and firm-fixed effect models. The cross-sectional analyses suggest that the effect of informed tweets on social media is stronger when the information environment is lower, further supporting the hoarding aversion effect. The results also suggest that informed tweets on social media serve as external monitoring mechanism. Controlling for alternative information acquisition channels, such as Google or the SEC EDGAR database does not change the inferences.

Suggested Citation

  • Md Miran Hossain & Babak Mammadov & Hamid Vakilzadeh, 2022. "Wisdom of the crowd and stock price crash risk: evidence from social media," Review of Quantitative Finance and Accounting, Springer, vol. 58(2), pages 709-742, February.
    • Handle: RePEc:kap:rqfnac:v:58:y:2022:i:2:d:10.1007_s11156-021-01007-x
    DOI: 10.1007/s11156-021-01007-x
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    References listed on IDEAS

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    Cited by:

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    2. Li, Qian & Liu, Shangqun, 2023. "Does alternative data reduce stock price crash risk? Evidence from third-party online sales disclosure in China," International Review of Financial Analysis, Elsevier, vol. 88(C).

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    More about this item

    Keywords

    Social media; Stock price crash risk; Information environment;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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