Working papers

Are Cryptos Different? Evidence from Retail Trading

(with Shimon Kogan, Igor Makarov, and Antoinette Schoar)   SSRN link  
Trading in cryptocurrencies has grown rapidly over the last decade, primarily dominated by retail investors. Using a dataset of 200,000 retail traders from eToro, we show that they have a different model of the underlying price dynamics in cryptocurrencies relative to other assets. Retail traders in our sample are contrarian in stocks and gold, yet the same traders follow a momentum-like strategy in cryptocurrencies. Individual characteristics do not ex- plain the differences in how people trade cryptocurrencies versus stocks, suggesting that our results are orthogonal to differences in investor composition or clientele effects. Furthermore, our findings are not explained by inattention, differences in fees, or preference for lottery-like stocks. We conjecture that retail investors hold a model of cryptocurrency prices, where price changes imply a change in the likelihood of future widespread adoption, which in turn pushes asset prices further in the same direction. R&R, Journal of Financial Economics (JFE)

The Social Signal

(with Tony Cookson, Runjing Lu, and William Mullins)   SSRN link   
We examine social media attention and sentiment from three major platforms: Twitter, StockTwits, and Seeking Alpha. We find that, even after controlling for firm disclosures and news, attention is highly correlated across platforms, but sentiment is not: its first principal component explains little more variation than purely idiosyncratic sentiment. Using market events, we attribute differences across platforms to differences in users (e.g., professionals vs. novices) and differences in platform design (e.g., character limits in posts). We also find that sentiment and attention contain different return-relevant information. Sentiment predicts positive next-day returns, but attention predicts negative next-day returns. These results highlight the importance of distinguishing between social media sentiment and attention across different investor social media platforms. In the burgeoning social finance literature, nearly all papers examine single platforms; our paper cautions that attention-related results from these papers will likely generalize but results concerning sentiment may not. R&R, Journal of Financial Economics (JFE)

Can Social Media Inform Corporate Decisions? Evidence from Merger Withdrawals

(with Tony Cookson and Christoph Schiller)   SSRN link   
This paper studies whether social media sentiment can predict merger withdrawals. We find that a standard deviation increase in social media sentiment after a merger announcement is associated with a 0.64 percentage points lower probability of withdrawal (16.6% of the average). This effect is unexplained by abnormal price reactions, traditional news, and analyst recommendations. Consistent with manager learning, the informativeness of social media strengthens after firms start corporate Twitter accounts. The informativeness is driven by longer acquisition-related tweets by fundamental investors, rather than memes and price trend tweets. These findings suggest that social media signals can be important for corporate decisions. R&R, Journal of Finance (JF)

Bad News Bearers: The Negative Tilt of the Financial Press

(with Eric So)   SSRN link   
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. R&R, Management Science (MS)

Strategic Disclosure Timing and Insider Trading

  SSRN link   
I provide evidence that managers strategically manipulate their company’s information environment to extract private benefits. Exploiting an SEC requirement that Rers 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 timing 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. R&R, Management Science (MS)

Does Disagreement Facilitate Informed Trading?

(with Tony Cookson and Vyacheslav Fos)   SSRN link   
Using high-frequency disagreement data from the investor social network StockTwits, we find that greater investor disagreement facilitates informed trading by activists and short sellers. These findings are unexplained by sentiment, news and retail order flow, and they remain when we measure disagreement overnight, which alleviates concern that disagreement and informed trading respond to a common shock. When short selling is costly, the facilitating effect of disagreement on trading is dampened for informed buyers but is amplified for sellers. These findings suggest that informed traders respond meaningfully to valuation changes induced by disagreement.

Published and Accepted Papers

Social Media and Financial News Manipulation
The Review of Finance (2023)

(with Shimon Kogan and Toby Moskowitz)   SSRN link   
We dissect an undercover SEC investigation into the manipulation of financial news on social media to study the indirect effects of market manipulation. While fraudulent news had a direct impact on retail trading and prices, revelation of the fraud caused market participants to discount all news, including legitimate news, from these platforms. The results highlight the indirect consequences of fraud and its spillover effects that reduce the social network’s impact on information dissemination, especially for small firms. The effect appears to dissipate over time, becoming insignificant a year later. The results highlight the importance of social capital for financial activity.

Initial Coin Offerings: Financing Growth with Cryptocurrency Token Sales
The Review of Financial Studies (2020), Lead Article and Editor's Choice

(with Sabrina Howell and David Yermack)   SSRN link   
Initial coin offerings (ICOs) have emerged as a new mechanism for entrepre- neurial 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
Journal of Finance (2020)

(with Tony Cookson)   SSRN link   
We study sources of investor disagreement using sentiment of investors from a so- cial media investing platform, combined with information on the users’ investment approaches (e.g., technical, fundamental). We examine how much of overall disagree- ment is driven by different information sets versus differential interpretation of infor- mation 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 in- formation differences are more important for trading than differences across market approaches.

Is Investor Attention for Sale? The Role of Advertising in Financial Market
Journal of Accounting Research (2019)

(with Joshua Madsen)   SSRN link   
Prior research documents capital market benefits of increased investor attention to ac- counting disclosures and media coverage, however little is known about how investors and markets respond to attention-grabbing events that reveal little nonpublic infor- mation. 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.