Published Papers

Social Media and Financial News Manipulation
with Shimon Kogan and Tobias J. Moskowitz

Forthcoming at the Review of Finance

We study fake news in financial markets using a novel dataset from an undercover SEC investigation. Our setting measures both the direct and indirect effects of market manipulation. Fake articles directly induce abnormal trading activity and increase price volatility, but in addition, the awareness of fake news from the SEC investigation indirectly affects legitimate articles, causing market participants to discount all news from these platforms. These spillover consequences significantly reduce the social network’s impact on information dissemination, trading, and prices. The results are particularly acute among small firms with high retail ownership and for the most circulated articles. The equilibrium response of consumers and producers of news on these networks is consistent with models of trust, providing novel evidence on the importance of social capital for financial activity.

Initial Coin Offerings: Financing Growth with Cryptocurrency Token Sales
with Sabrina Howell and David Yermack

Lead article and Editor's Choice, The Review of Financial Studies, Issue ​33 (9) 2020, pp 3925–3974

Initial coin offerings (ICOs) have emerged as a new mechanism for entrepreneurial finance, with parallels to initial public offerings, venture capital, and pre-sale crowdfunding. In a sample of more than 1,500 ICOs that collectively raise $12.9 billion, we examine which issuer and ICO characteristics predict successful real outcomes (increasing issuer employment and avoiding enterprise failure). Success is associated with disclosure, credible commitment to the project, and quality signals. An instrumental variables analysis finds that ICO token exchange listing causes higher future employment, indicating that access to token liquidity has important real consequences for the enterprise.

Why Don't We Agree? Evidence from a Social Network of Investors

with Anthony Cookson

Journal of Finance Vol 75, No 1 (February 2020), pp. 173-228

We study sources of investor disagreement using sentiment of investors from a social media investing platform, combined with information on the users' investment approaches (e.g., technical, fundamental). We examine how much of overall disagreement is driven by different information sets versus differential interpretation of information by studying disagreement within and across investment approaches. Overall disagreement is evenly split between both sources of disagreement, but within-group disagreement is more tightly related to trading volume than cross-group disagreement. Although both sources of disagreement are important, our findings suggest that information differences are more important for trading than differences across market approaches.

Is Investor Attention for Sale? The Role of Advertising in Financial Markets

with Joshua Madsen

Journal of Accounting Research Vol 57, Issue 3 (June 2019), pp. 763-795

Prior research documents capital market benefits of increased investor attention to accounting disclosures and media coverage, however little is known about how investors and markets respond to attention-grabbing events that reveal little nonpublic information. We use daily firm advertising data to test how advertisements, which are designed to attract consumers' attention, influence investors' attention and financial markets (i.e., spillover effects). Exploiting the fact that firms often advertise at weekly intervals, we use an instrumental variables approach to provide evidence that print ads, especially in business publications, trigger temporary spikes in investor attention. We further find that trading volume and quoted dollar depths increase on days with ads in a business publication. We contribute to research on how management choices influence firms' information environments, determinants and consequences of investor attention, and consequences of advertising for financial markets.

Working Papers:

Can Social Media Inform Corporate Decisions? Evidence from Merger Withdrawals
with J. Anthony Cookson and Christoph Schiller

This paper examines the role of social media in informing corporate decision-making by studying the decision of firm management to withdraw an announced merger. A standard deviation decline in abnormal social media sentiment following a merger announcement predicts a 0.73 percentage point increase in the likelihood of merger withdrawal (18.9% of the baseline rate). The informativeness of social media for merger withdrawals is not explained by abnormal price reactions or news sentiment, and in fact, it is stronger when these other signals disagree. Consistent with learning from external information, we find that the social media signal is most informative for complex mergers in which analyst conference calls take a negative tone, driven by the Q&A portion of the call. Overall, these findings imply that social media is not a sideshow, but an important aspect of firm information environment.

Strategic Disclosure Timing and Insider Trading

Revision requested at Management Science

I provide evidence that managers strategically manipulate their company’s information environment to extract private benefits. Exploiting an SEC requirement that managers disclose certain material corporate events within five business days, I show that managers systematically disclose negative events when investors are more distracted, causing returns to under-react for approximately three weeks. Strategic disclosure tim- ing is concentrated among smaller firms with high retail-investor ownership and low analyst coverage. Furthermore, I use the fact that most insider sales are scheduled in advance to demonstrate that top managers are more than twice as likely to strategically time disclosures if the return under-reaction benefits their insider sales. Finally, I find that firms that systematically disclose negative news on Fridays have higher levels of earnings management.

Bad News Bearers: The Negative Tilt of Financial Press

with Eric C. So

We show the financial press is more likely to cover firms with deteriorating performance. Our main tests illustrate the nature of the media's story selection process (i.e., what events to cover) and the usefulness of this selection process for forecasting firms' future earnings news and returns. We first show the media is approximately 11-to-19 percent more likely to cover a firm's earnings announcements if they convey poor performance. Similarly, in forecasting tests, greater media coverage predicts subsequently announced declines in firms' profitability and negative analyst-based earnings surprises. A simple long-short strategy betting against firms with high media coverage yields an average return of roughly 40 basis points per month, suggesting media coverage helps forecast future returns because the story selection process is titled toward novel negative events. Together, our findings highlight the usefulness of the media's coverage decisions in estimating expected returns, as well as a potential inference problem when researchers use media coverage to measure the extent of information dissemination and/or whether an information event occurred.

Does Disagreement Facilitate Informed Trading? 
with J. Anthony Cookson and Vyacheslav Fos

We study the effect of investor disagreement on informed trading by activist investors using high-frequency disagreement data derived from the investor social network StockTwits. Greater investor disagreement leads to more trading in the subsequent day by privately-informed ac- tivists. Disagreement leads to higher prices and improvements in measured liquidity, but these observed valuation and market liquidity differences do not explain the increase in activist trad- ing. Instead, investor disagreement affects activist trading primarily by facilitating trading by non-activist investors. These findings suggest that investor disagreement not only affects trad- ing by uninformed investors, but also facilitates trading by informed market participants who often take actions aimed at changing corporate policies.