The effect of social media on corporate violations: Evidence from Weibo posts in China

Jing Zhou, Silin Ye, Wei Lan and Yunwen Jiang

International Review of Finance, 2021, vol. 21, issue 3, 966-988

Abstract: At the new stage of information technology era, the transmission of information between listed companies and investors may not be dominated by traditional media, but the widely used social media which can provide additional information to listed companies. We utilize the volume of Weibo posts by individuals to generate a direct attention proxy for the effect of social media in China. By applying the latent instrument variables (LIV) approach to control for endogeneity problem, we find that investor attention brought by social media after violations announcements positively affects corporate violations, as reflected in a higher probability and more timely action to redress violations. The positive Weibo‐based attention effects are stronger when executives are more concerned about their reputations and companies have better reputations in the capital markets. This paper shows that building an effective and efficient social media platform can better inspire investors to actively pay their attention to certain information of listed companies. Such investors' active attention may form a monitoring role in listed companies and thereby substitute for some external mechanisms to protect their own rights.

Date: 2021
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