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Can social media distort price discovery? Evidence from merger rumors

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  • Jia, Weishi
  • Redigolo, Giulia
  • Shu, Susan
  • Zhao, Jingran

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.

Suggested Citation

  • Jia, Weishi & Redigolo, Giulia & Shu, Susan & Zhao, Jingran, 2020. "Can social media distort price discovery? Evidence from merger rumors," Journal of Accounting and Economics, Elsevier, vol. 70(1).
    • Handle: RePEc:eee:jaecon:v:70:y:2020:i:1:s0165410120300367
    DOI: 10.1016/j.jacceco.2020.101334
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    More about this item

    Keywords

    Social media; Twitter; Merger and acquisition; Rumor; Merger rumor; Persuasion bias;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M15 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - IT Management
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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