Can social media distort price discovery? Evidence from merger rumors
Weishi Jia,
Giulia Redigolo,
Susan Shu and
Jingran Zhao
Journal of Accounting and Economics, 2020, vol. 70, issue 1
Abstract:
We study whether social media can play a negative information role by impeding price discovery in the presence of highly speculative rumors. We focus on merger rumors, where most do not materialize. We find that merger rumors accompanied by greater Twitter activity elicit greater immediate market reaction even though rumor-related Twitter activity is unrelated to the probability of merger realization. The price distortion associated with tweet volume persists weeks after a rumor and reverses only after eight weeks. The price distortion is more pronounced for rumors tweeted by Twitter users with greater social influence, for target firms with low institutional ownership, and for rumors that supply more details. Our evidence suggests that social media can be a rumor mill that hinders the market's price discovery of potentially false information.
Keywords: Social media; Twitter; Merger and acquisition; Rumor; Merger rumor; Persuasion bias (search for similar items in EconPapers)
JEL-codes: G14 M15 M40 M41 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (26)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:70:y:2020:i:1:s0165410120300367
DOI: 10.1016/j.jacceco.2020.101334
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