The Rise of Reddit: How Social Media Affects Retail Investors and Short-sellers’ Roles in Price Discovery

49 Pages Posted: 2 Apr 2021

See all articles by Danqi Hu

Danqi Hu

Northwestern University - Kellogg School of Management

Charles M. Jones

Columbia Business School

Valerie Zhang

Northwestern University

Xiaoyan Zhang

Tsinghua University - PBC School of Finance

Date Written: March 14, 2021

Abstract

Using data from social media platform Reddit from 2020 and 2021, we examine how stock prices, retail trading and short-selling are inter-connected with social media activity. More Reddit traffic, more positive tones, more disagreement and higher connectedness at Reddit lead to higher returns, higher retail order flow, and lower shorting flows on the next trading day. The information content of the social activity variables is different from that of retail order flows and shorting flows, and they are each a significant predictor for future returns. Interestingly, when there is higher traffic, more positive tone, more disagreement and higher connectedness on Reddit, the shorting flows become even more informative and predict even lower future returns. A closer look at Robinhood 50 stocks shows that these stocks are more affected by social media activity. Positive retail order flows predict even higher future returns for these stocks, while heavy shorting flows in these stocks also more significantly predict low future returns.

Keywords: social media, short selling, intraday trading, retail investors

JEL Classification: G11, G12, G14, G23

Suggested Citation

Hu, Danqi and Jones, Charles M. and Zhang, Valerie and Zhang, Xiaoyan, The Rise of Reddit: How Social Media Affects Retail Investors and Short-sellers’ Roles in Price Discovery (March 14, 2021). Available at SSRN: https://ssrn.com/abstract=3807655 or http://dx.doi.org/10.2139/ssrn.3807655

Danqi Hu (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2211 campus drive
EVANSTON, IL 60208
United States

Charles M. Jones

Columbia Business School ( email )

3022 Broadway
Uris Hall Rm 101
New York, NY 10027
United States
(212) 854-4109 (Phone)

HOME PAGE: http://https://www8.gsb.columbia.edu/cbs-directory/detail/cj88

Valerie Zhang

Northwestern University

2001 Sheridan Road
Evanston, IL 60208
United States

Xiaoyan Zhang

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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