The Role of Social Media in Financial Markets
Al Guindy, Mohamed
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This three-essay thesis examines the role of social media in financial markets from multiple perspectives. Chapter 2 explores the economic consequences of the Securities and Exchange Commission’s (SEC’s) regulation of corporate use of social media. Following the April 2nd, 2013 SEC regulation allowing firms to use social media to communicate financial information to investors, corporate tweeting becomes informative: meaning that a firm’s stock price responds to its own tweeting. This was not the case prior to the regulation. Chapter 3 examines whether firms that use social media have a lower cost of equity capital. To the extent that the use of Twitter can lower information asymmetry between firms and investors, firms’ cost of capital is expected to be reduced. The two findings of chapter 3 are that 1) the use of Twitter corresponds to a lower cost of equity capital, and 2) firms that face the greatest information asymmetries – namely smaller firms, firms that are covered by the least number of analysts, and firms with the least proportion of institutional ownership, benefit particularly from tweeting financial information about their firm. Chapter 4 turns to investors’ use of Twitter. Harnessing the wisdom of the crowd, Twitter daily sentiment about stocks corresponds to daily stock prices. Specifically, positive Twitter sentiment corresponds to higher returns and negative sentiment corresponds to lower returns. Furthermore, firms whose stock exhibits the greatest dispersion of analyst forecasts are tweeted about more often. This suggests that social media provides an outlet where investors provide opinion and discussions about stocks, especially in the absence of analysts’ (professional) consensus.