Does social media distort price discovery? Evidence from rumor clarifications

Using a sample of clarification announcements for all A-share listed firms from 2008 to 2020, we reveal the influence of social media activities on price discovery after rumor clarifications in China. As big information events, rumors significantly impact return performance before and after the official release. For the influences of social media activities, these activities intensify the short-term market’s response to clarification announcements, while in the long-term period, the influences of social media activity are variant: it speeds return reversal for the whole sample, insignificantly influences return reversal following positive rumor clarifications, and has a varied impact on price persistence following negative rumor clarifications. Our findings are robust when controlling return-related determinants and using new proxies for social media activities and CARs. The results based on rumor clarifications announced during the non-trading period further support the causality. Therefore, we determine the impact of social media activities on price discovery following rumor clarifications.