The Effect Of Social Media On The Capital Market And Its Participants

Due to the development of the Internet,the rapid rise of social media has not only influenced public opinion and spawned new business models but also changed the information environment and participants’ behaviors in the capital market.Playing a key role in information dissemination of the capital market in the Internet age,social media could be closely related to stock price dynamics and market participants such as listed companies,investors,and analysts.Studying the relationship between social media and risk management or market participants will not only help advance the understanding of information dissemination,asset pricing,and corporate governance but also help build a robust capital market and promote the sustainable development of China’s financial industry.Therefore,this dissertation attempts to explore the impact of social media on the capital market from both macro and micro levels as well as four perspectives: stock price bubble formation,corporate innovation performance,fund managers’ investment decisions,and market reactions towards analyst forecasts.First,this dissertation examines how social media content affects the formation of stock price bubbles.Using postings on East Money.com and stock trading data,the dissertation finds that the number of stock postings in one week is positively correlated with the bubble magnitude in the next week.From the cross-sectional perspective,the dissertation utilizes the 2015 A-share bubble episode and finds that the more postings on the firm’s stock message board,the larger the stock price bubble.Results from a series of robustness tests demonstrate the above findings do not depend on variable construction and sample selection.Motivated by the resale option theory,the dissertation conjectures that the postings on stock message boards enhance the intensity of stock price bubbles by increasing investors’ over-optimism as well as disagreement and provides evidence in support of this mechanism.Second,this dissertation examines how social media content affects corporate innovation.Using postings on East Money.com and data from China National Intellectual Property Administration and Google Patent,the dissertation finds that the number of innovation-related postings on stock message boards is positively correlated with the number of patent applications that are eventually granted and the number of citations received by patents in the future.To establish causality,the dissertation adopts instrumental variables based on firms’ index membership and advertising expenditure and a difference-in-differences analysis based on the launch of the mobile application for stock message boards.Furthermore,the dissertation examines the mechanisms behind the phenomena mentioned above and demonstrates that stock message board postings can enhance innovation output by improving firms’ transparency and governance.Furthermore,this dissertation examines how social media content influences fund trades.Using postings on East Money.com and mutual fund data from the CSMAR database,the dissertation finds that,on the whole,postings on stock message boards are negatively related to mutual funds’ purchasing(i.e.,the more postings on a firm’s stock message board,the fewer shares of the firm the fund will buy),but there is no statistically significant relationship between stock message board postings and funds’ selling.Further analysis shows that funds exhibit persistent differences in their propensity to follow stock message board postings and that their propensity to follow stock message boards to sell stocks(i.e.,the more stock message board postings,the more the fund will sell the stock)is positively related to their future performance.These conclusions hold when using alternative measures for postings and alternative methods for return calculation.Besides,the dissertation also rules out the possibility that the above results are due to funds’ tendency to cater to investors.Finally,this dissertation examines how social media content affects market responses to analyst reports.Using data from Sina Weibo and analyst reports,the dissertation finds that the market reaction to an analyst report is substantially reduced when the analyst report is preceded by the firm’s Weibo usage within a week,which means that firms’ Weibo accounts can substitute for analyst reports in providing information to the market.This phenomenon persists after using instrumental variables to deal with endogeneity,controlling for different fixed effects,and using different time windows.Further analysis shows that the effect of firms’ usage of Weibo is more pronounced when there are more Weibo postings,more words,more reposts,more comments,lower institutional shareholding,and more analyst following.In addition,the dissertation also rules out two possible explanations,i.e.,firms’ Weibo usage could affect the information content of analyst reports and cause insufficient market reactions to analyst reports.In short,this dissertation advances the understanding of the role of social media in the capital market and helps people better evaluate the challenges and opportunities brought by social media,thereby contributing to the development of the theoretical framework of “social media and the capital market” and justifying supervision on social media.