Social media effect, investor recognition and the cross-section of stock returns

Meng, Xiangtong; Zhang, Wei; Li, Youwei; Cao, Xing; Feng, Xu

Abstract

Investor recognition affects cross-sectional stock returns. In informationally incomplete markets, investors have limited recognition of all securities, and their holding of stocks with low recognition requires compensation for being imperfectly diversified. Using the number of posts on the Chinese social media platform Guba to measure investor recognition of stocks, this paper provides a direct test of Merton’s investor recognition hypothesis. We find a significant social media premium in the Chinese stock market. We further find that including a social media factor based on this premium significantly improves the explanatory power of Fama-French factor models of cross-sectional stock returns, and these results are robust when we control for the mass media effect and liquidity effect. Finally, we find that investment strategies based on the social media factor earn sizable risk-adjusted returns, which signifies the importance of the social media premium in portfolio management.

Citation

Meng, X., Zhang, W., Li, Y., Cao, X., & Feng, X. (2020). Social media effect, investor recognition and the cross-section of stock returns. International review of financial analysis, https://doi.org/10.1016/j.irfa.2019.101432

• Journal Article Type: Article
• Acceptance Date: Nov 26, 2019
• Online Publication Date: Dec 9, 2019
• Publication Date: 2020-01
• Deposit Date: Dec 9, 2019
• Publicly Available Date: Jun 10, 2021
• Journal: International Review of Financial Analysis
• Print ISSN: 1057-5219
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• DOI: https://doi.org/10.1016/j.irfa.2019.101432
• Keywords: Social media; Investor recognition; Asset pricing
• Public URL: https://hull-repository.worktribe.com/output/3303544
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S1057521919304818?via%3Dihub
• Contract Date: Dec 9, 2019