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The democratization of investment research and the informativeness of retail investor trading

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  • Farrell, Michael
  • Green, T. Clifton
  • Jame, Russell
  • Markov, Stanimir

Abstract

We study the effects of social media on the informativeness of retail trading. Our identification strategy exploits the editorial delay between report submission and publication on Seeking Alpha, a popular crowdsourced investment research platform. We find the ability of retail order imbalances to predict the cross-section of stock returns and cash-flow news increases sharply in the intraday post-publication window relative to the pre-publication window. The findings are robust to controlling for report tone and stronger for reports authored by more capable contributors. The evidence suggests that recent technology-enabled innovations in how individuals share information help retail investors become better informed.

Suggested Citation

  • Farrell, Michael & Green, T. Clifton & Jame, Russell & Markov, Stanimir, 2022. "The democratization of investment research and the informativeness of retail investor trading," Journal of Financial Economics, Elsevier, vol. 145(2), pages 616-641.
    • Handle: RePEc:eee:jfinec:v:145:y:2022:i:2:p:616-641
    DOI: 10.1016/j.jfineco.2021.07.018
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    3. Farrell, Michael & Murphy, Dermot & Painter, Marcus & Zhang, Guangli, 2023. "The complexity yield puzzle: A textual analysis of municipal bond disclosures," Working Papers 338, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
    4. Eaton, Gregory W. & Green, T. Clifton & Roseman, Brian S. & Wu, Yanbin, 2022. "Retail trader sophistication and stock market quality: Evidence from brokerage outages," Journal of Financial Economics, Elsevier, vol. 146(2), pages 502-528.
    5. Outlaw, Dominique, 2023. "Frenzied buyers and sophisticated sellers: How short sellers trade individual investors’ most purchased stocks," Journal of Behavioral and Experimental Finance, Elsevier, vol. 39(C).
    6. Felix Reichenbach & Martin Walther, 2023. "Financial recommendations on Reddit, stock returns and cumulative prospect theory," Digital Finance, Springer, vol. 5(2), pages 421-448, June.
    7. Jinzhi Lu & Pingyang Gao, 2024. "Short, Disclose, and Distort," Papers 2404.07630, arXiv.org.
    8. David Ardia & Cl'ement Aymard & Tolga Cenesizoglu, 2024. "Revisiting Boehmer et al. (2021): Recent Period, Alternative Method, Different Conclusions," Papers 2403.17095, arXiv.org.
    9. Daniel Bradley & Jan Hanousek & Russell Jame & Zicheng Xiao, 2024. "Place Your Bets? The Value of Investment Research on Reddit’s Wallstreetbets," The Review of Financial Studies, Society for Financial Studies, vol. 37(5), pages 1409-1459.

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