Can Social Media Distort Price Discovery? Evidence from Merger Rumors

67 Pages Posted: 17 Jul 2017 Last revised: 13 Jul 2020

See all articles by Weishi Jia

Weishi Jia

Cleveland State University - Monte Ahuja College of Business

Giulia Redigolo

ESADE Business School; Emory University - Department of Accounting

Susan Shu

Boston College - Carroll School of Management

Jingran Zhao

Hong Kong Polytechnic University

Date Written: July 3, 2020

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.

Keywords: social media, Twitter, rumor, merger rumor, media

JEL Classification: G14; G40, G41, M15; M40; M41

Suggested Citation

Jia, Weishi and Redigolo, Giulia and Shu, Susan and Zhao, Jingran, Can Social Media Distort Price Discovery? Evidence from Merger Rumors (July 3, 2020). Journal of Accounting & Economics (JAE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2999956 or http://dx.doi.org/10.2139/ssrn.2999956

Weishi Jia

Cleveland State University - Monte Ahuja College of Business ( email )

1860 E 18th St #420
Cleveland, OH 44114
United States

Giulia Redigolo

ESADE Business School ( email )

Av. de Pedralbes, 60-62
Barcelona, 08034
Spain

Emory University - Department of Accounting ( email )

Goizueta Business School
1300 Clifton Road
Atlanta, GA 30322
United States

Susan Shu (Contact Author)

Boston College - Carroll School of Management ( email )

Boston College
140 Commonwealth Ave.
Chestnut Hill, MA 02167
United States
617-552-1759 (Phone)

Jingran Zhao

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

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