Social media effect,investor recognition and the cross-section of stock returns |
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| Institution: | 1. College of Management and Economics, Tianjin University, No. 92 Weijin Road, Nankai District, Tianjin 300072, China;2. China Centre for Social Computing and Analytics, Tianjin 300072, China;1. School of Economics & Management, University of Chinese Academy of Sciences, Beijing 100190, China;2. Research Center on Fictitious Economy & Data Science, Chinese Academy of Sciences, Beijing 100190, China;3. Key Laboratory of Big Data Mining & Knowledge Management, Chinese Academy of Sciences, Beijing 100190, China;4. Sino-Danish College, University of Chinese Academy of Sciences, Beijing 100049, China;1. The College of Business, Florida State University, P.O. Box 3061110, Tallahassee, FL 32306-1110, United States;2. Manning School of Business, University of Massachusetts Lowell, 1 University Avenue, Lowell, MA 01854, United States |
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| 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. |
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