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Social media discussion and the market reaction to earnings announcements: evidence from China

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  • Naiqian Wu
  • Weiguo Xiao
  • Wei Liu
  • Zhihui Zhao

Abstract

This study investigates the influence of earnings-related social media discussion on stock returns surrounding the earnings announcement. By using deep learning approach to develop a new measure of market-wide earnings expectations based on Chinese Sina Weibo, we find that the constructed Weibo optimism index is positively related to the upcoming earnings announcement returns within a short window. This positive effect is more pronounced for firms with lower-quality earnings and firms with no traditional media coverage. Additionally, we also find that an increase in our Weibo optimism index indicates stronger post-announcement return reversals over a longer window. These results imply that earnings-related social media discussion is largely driven by sentiments, leading investors to overreact to earnings announcements. Our evidence supports the view that social media impedes stock price efficiency in financial markets.

Suggested Citation

  • Naiqian Wu & Weiguo Xiao & Wei Liu & Zhihui Zhao, 2023. "Social media discussion and the market reaction to earnings announcements: evidence from China," Applied Economics Letters, Taylor & Francis Journals, vol. 30(10), pages 1338-1346, June.
    • Handle: RePEc:taf:apeclt:v:30:y:2023:i:10:p:1338-1346
    DOI: 10.1080/13504851.2022.2053050
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