With the development of internet, social media has become an important platform for information transmission and public opinion expression. The opinions expressed by investors on social media can affect the decisions of other investors, and thus influence the stock market. This article will analyze the predictive power of investor opinions on future stock returns and earnings surprises. The data comes from Seeking Alpha, one of the most popular social media platforms for investors in the US. We find that the negative tone expressed in both articles and comments on Seeking Alpha negatively predict future stock returns. The opinions also strongly predict subsequent earnings surprises, suggesting they contain value-relevant information beyond that provided by financial analysts. There are a few mechanisms through which social media facilitates valuable investor interactions, including monetary incentives, visibility of feedback, and shared objective of expedited price convergence. In summary, social media allows investors to derive and share valuable opinions on stocks, making it an important channel for investment decisions.
The opinions expressed in Seeking Alpha articles and comments predict lower future stock returns
The data used in this study comes from Seeking Alpha, one of the most popular social media platforms for investors to share analysis and opinions on stocks. Through text analysis, the negative tone expressed in both articles and comments are quantified by the frequency of negative words. Regressing future 3-month stock returns on the negative tone shows that more negative articles and comments predict lower subsequent returns. For example, a stock with articles and comments that are one standard deviation more negative than average will have about 1% lower returns in the next 3 months. Two mechanisms may explain this return predictability. First, the opinions contain value-relevant information not yet reflected in prices. As this information gradually gets incorporated into prices through subsequent investor reaction and news arrival, it causes the observed price changes. Second, the opinions may reflect false information but still influence naive investors to trade and move prices. To differentiate between the two explanations, the analysis further examines earnings surprises.
The opinions expressed in Seeking Alpha articles and comments also strongly predict earnings surprises
Earnings surprises measure the difference between actual EPS and the average analyst forecast made prior to the earnings announcement. Regressing this measure on the negative tone of Seeking Alpha articles and comments in the 30 days leading up to the announcement shows that more negative tone strongly predicts more negative earnings surprises. Since corporate earnings are unlikely to be caused by opinions expressed on Seeking Alpha, this return predictability confirms that the opinions contain value-relevant information beyond what is provided by Wall Street analysts. Overall, the analysis demonstrates that investor opinions expressed on social media do have predictive power for future stock returns and earnings surprises. This suggests social media facilitates valuable interactions between investors that incorporate relevant information into stock prices.
The mechanisms that make social media a valuable source of investment opinions
There are a few key factors of social media that enable investors to derive and share valuable opinions with each other. First, authors earn monetary compensation based on the visibility and popularity of their articles, incentivizing them to provide good investment advice. Second, authors receive direct feedback from readers through comments and page views, allowing useful advice to gain more attention. Third, informed authors are motivated to share their ideas on social media to convince other investors and thus expedite the incorporation of information into prices. Overall, social media creates an ecosystem that motivates investors to produce and propagate useful opinions and analysis, making it a valuable platform for gathering investment information.
In summary, this article demonstrates that opinions expressed by investors on social media platforms like Seeking Alpha have predictive power for future stock returns and earnings surprises. The visibility of feedback and monetary incentives facilitate high-quality interactions between investors. Social media has become an important channel for investors to share and receive valuable opinions on stocks.