CUNY - Baruch College

Social Media and the Financial Market

Bryan Fong
CIS 310 NET 1B
Spring 2013
Professor Pearl Weisel

Social Media and the Financial Market

Why is this topic important?
There are many factors that affect prices of securities in the stock market and it is safe to
say that the media has a significant impact on the financial market. A financial market is a
market where people can trade financial securities, commodities and other items of value at
prices that reflect supply and demand. This supply and demand is dependent on the information
available to the public from the media. Through the financial market, companies are able to raise
money through selling ownership of their company. Likewise, people are able to invest money
and purchase parts of the company and hope to make a profit. Trillions of dollars are traded in
the stock market each day and as business students or even as potential investors, it is important
to understand how the media, especially new media, affects the market and the valuation of
stocks in the market.
What are old and new media?
Whether we like it or not, we can agree that media has slowly integrated into our lives.
Not many people know this, but media can be separated into two types - old media and new
media. Old media comprises of traditional means of communication that existed before the
Internet. This would include television, radio, movies, newspapers, etc. As the internet became a
necessity in a common household, people stopped relying on old media and started becoming a
loyal servant of new media. Technology became so advance that we can access new media
through our home computers and even through our phones and personal devices.
In the past, people relied on what they hear, what they read in the newspaper and what
they see on TV to know how a stock is doing. They would read the Wall Street Journal, New

York Times or be on the lookout for news relevant to their stock on news channels. Old media
was their primary source of information and it was a very slow medium of communication.
Newspapers were released once a day and they could not control the information released on
news channels. Today, people can check the latest information on their computer or on their
phone. Investors are able to check stock prices with a click of a button on their phone anywhere
and at any given time. In addition, social media platforms, like Facebook and Twitter, are very
powerful in that people share information and this transfer of information can peoples judgment
of the stock and affect its price.
What is the impact of old media in Financial Markets?
If old media was investors primary source of information, what happens when these
newspaper companies go on strike? Joel Peress investigated the impact on the financial markets
due to media blackouts resulting from national newspaper strikes. Peress collected data from
52 national newspaper strikes, which lasted on average of 1.7 business days concentrated in
France, Greece, Italy and Norway.
These strikes occur mostly due to economic condition, such as employment, salary,
pensions, tax breaks, and other benefits. Other times, it would be called to fight the freedom of
press and censorship. For example in January 2002, Italian print workers halted production of
Italy's newspapers to protest planned labor and pensions reforms by the government of Silvio
Berlusconi; later in June, Norwegian journalists silenced the press for 9 days (7 business days)
over disputed vacation benefits; in July 2004, Greek journalists went on strike for 48 hours
following the breakdown of talks for a collective wage agreement (Peress, 2011). These strikes
prevent investors from receiving information because either the newspaper was not written,

printed or distributed. By measuring the abnormal turnover of stocks, Peress found that trading
activity is considerably weaker on strike days. He found that trading activity decreased 18% on
average across all stocks.
Next, Peress looked back at home for evidence. There hasnt been a national newspaper
strike in the US, but there were several local newspaper strikes. These local strikes may affect
trading behaviors of investors who depend on the striking newspapers for information. The three
strikes Peress analyzed are the following:
1. A strike by drivers forced Pittsburgh's two daily newspapers, the Post-Gazette and The
Pittsburgh Press, to stop publishing on May 18, 1992 for several weeks.
2. 2) San Francisco's two main daily newspapers, the San Francisco Chronicle and San
Francisco Examiner, had to shut down printing plants on November 3rd, 1994 for 11
days because of a strike by 2,600 journalists, editors, lorry drivers, press operators and
paper handlers;14
3. Detroits two largest newspapers, the Detroit Free Press and The Detroit News, were hit
by a strike on July 14, 1995 which lasted several months. (Peress, 2011)
Peress studied trading behaviors of investors located in a 100km radius and he found that local
strikes have a small impact on the trading in that city.
What is the correlation between stories reported by the media and the reaction of the stock
market?
In a research by Joseph Engelberg and Christopher A. Parsons, they try to find the
correlation between stories reported by the media and the reaction of the stock market. They

analyze the daily local newspaper of 19 major US cities. The main result is that for an earnings
announcement by a given S&P 500 Index firm, trading in each of the 19 local markets is strongly
related to whether the local paper covers the announcement. All else equal, local press coverage
increases the daily trading volume of local retail investors, from 8% to nearly 50% depending on
the specification (Engelberg, 2011).
For example, on November 9, 2007, Detriot News reported a story about DTE Energy a
day after it reported its third quarter earnings. They reported that DTEs third quarter EPS of
$1.16 is higher than its prior years EPS of $1.06. On February 21, 2008, DTE released its fourth
quarter earnings of $1.56 per share, which is higher than its prior years P/E of $.80 per share.
The Detroit News did not cover this second story and even though the EPS was higher in both
quarters and even higher in the fourth quarter the overall trading volume was 21% higher in
the three trading days after the third quarter compared to the fourth (Engelberg, 2011).
What does this have to do with the impact of new media?
The previous two examples were focused on newspapers, which is a form of old media.
How does this apply to new media? With new media, we are relying on the internet and the
internet providers. If there is a local blackout, then investors would be unable to receive
information and trade, causing the trading volume to decrease. Also, if WSJ goes on strike, their
app users would not be able to get information and that can also decrease trading volume. Lastly,
if WSJ doesnt report certain announcements like Detroit News, they can affect the trading
volume and the stock price. The correlation between old media and the stock market applies to
new media as well.
How does news affect the stock market?

It is also important for investors to keep up with the current news because there may be
news that the market does not react to, therefore, the investor has to be able to react quickly to
the news and grasp whether it will affect the stock prices.

Good official news will cause stock prices to rise.

Stock prices react to negative news quicker than with positive news

Good news at home and bad news abroad can adversely push stock prices down

In a negative atmosphere, the slightest bit of worrisome news is enough to send a stock
tumbling. (Share Market School)

These concepts are important to understand because we will be moving onto more specific
examples of how social media platforms affect stock prices.
Hype
Who hasnt heard of the infamous Facebook? Facebook is worlds largest social network,
housing more than one billion users. In 2012, Facebook declared that it will go public and
everybody was dying to get a part of it. The media was hyping up the IPO without carefully
analyzing the stocks. In addition, blogs and social media statuses were being positive about the
IPO. Due to a glitch, Facebook closed at $38.23, only 23 cents above its IPO, but since the IPO,
Facebooks stock fell to more than 10 dollars, causing investors to lose significant amount of
money. The hype gave investor confidence that Facebooks IPO was a winner, but the hype fell
short and investors got the short end of the stick. People are blaming the media for not being
skeptical enough, but it is not the medias job to protect the investors. The hand-wringing over
"gullible investors who got singed" is getting out of control, says William D. Cohan

at Bloomberg. Investors have to understand that "investing in IPOs is a fool's game" (The
Week). This shows how investors didnt really think for themselves and believe in what they
hear and go along with the hype. This hype from the media can change the way investors feel
about a stock even if its false.
iPhone Rumors
Apple used to dominate the phone market with its iPhone and it is not surprising to see
how rumor affects stock prices of Apple. According to a chart on Tuaw.com, you can see how
stock prices typically increase after an official announcement of a new iPhone model. In the first
month of September 2012, Apple is rumored to be announcing a new iPhone in the coming
weeks and the stock has reached another all-time high (Tuaw.com).
According to the Wall Street Journal, one of the rumors rumbling through the
Twitterverse is Apple could announce a stock-split at its shareholder meeting tomorrow. A
stock split does nothing, but makes the stock price lower, but this allows smaller investors to buy
shares of the company. There are many reasons why this rumor may be false. For example, a
stock split may only give the stock a temporary bump. At the end of the trading day, Apple
stocks still manage to increase by 1.5% to $449.32.
Master Kong Rumor
Master Kong is Chinas best rated brand of instant noodle founded in Tianjin, China in
1991. Master Kong has Taiwanese and Japanese board members, but Master Kong only exist
and operate in mainland China. According to Danwei.com, the company is the leading player in
Chinas instant noodle restaurant market as well as a producer of drinks and snacks, however,

in the last few months of 2012, Master Kong experienced a PR crisis when rumors linked the
company to the wrong side of the Diaoyu Islands dispute.
The Japanese government reached an agreement with the Kurihara family and on
September 5, 2012, announced that it will nationalize three of the five Diaoyu Island. The
Diaoyu Island has been attracting Hong Kong and Taiwan nationalist activists as well. Ten days
after the Japanese announcement, the biggest anti-Japanese protest 1972 erupted. Over the next
couple of days the protests turned violent, with protesters clashing with police, attacking
Japanese-made cars, and barricading Japanese restaurants (Danwei).
Naturally, people took this intense tension into the social media. Speculation started to
appear on Weibo that Master Kong was owned by Japanese capital and should therefore be
boycotted. On the September 20, Master Kong issued a statement in which it denied the
speculation. On October 8, however, the speculation regarding Master Kongs true owners was
surpassed by the appearance of a potentially deadly rumor in the context of the Diaoyu Islands
dispute raging at the time (Danwei). On October 8, there was a short post called Master Kong
donated 300 million ten to Japan for it to buy the Diayu Islands on Sina blog, which reads:
Tear off Master Kongs outer layer, and a sheepskin of Japanese goods appears! It has
been revealed online that the company which calls itself Taiwanese has actually been
bought out by Japans Asahi Breweries. With Master Kongs drinks and noodles visible
everywhere on Chinese soil, this grieves us greatly! We are firmly resolved not to buy
anything from Master Kong from now on. Everybody spread this message, let all our
compatriots know! Asahi Breweries contributed 300 million yen for Japan to buy the
Diaoyu Islands, this trashy company!

On October 12, Master Kongs stock prices began to decrease, while Master Kong
continues to deny the rumors. On October 31, Taiwan Affairs Office of State Councils
spokesperson, denied that Master Kong is a Japanese brand, however, On November 3, China
Times, a mainland newspaper, published a story revealing the mastermind of the rumor. It
showed that the mastermind was actually Uni-President, one of Master Kongs biggest
competitors in instant noodle market. The article also explained that Japanese firm Sanyo Food
did invest in Master Kong, but it never became a major stockholder. By January 3, 2013, Master
Kong has hit its lowest ebb at nearly 20 dollars a share, however, soon after; Master Kongs
stock prices are starting to increase after a long decline that started in October.
Twitter
Twitter is powerful social media platforms that affect the valuation of prices of securities
in the stock market. One tweet does not have enough power to manipulate a stock price, but
social media on a large scale does have the power. It can alter the way companies precede with
their plan. For example, many of the top banks were, up until recently, considering
imposing fees on debit card users, but the social media backlash seems to have put them off the
idea, and most of the banks have quietly dropped the idea as a result. This demonstrates that if a
company does something unpopular, the backlash will happen a lot more quickly, and this can
have the power to alter business decisions and therefore the share price (Intelligent HQ).
In a study published in 2010, Johan Bollen, a computer scientist at Indiana University,
analyzed millions of twitter posts in relation to the Dows performance from August to October
2008. [He] investigated whether measurements of collective mood states derived from largescale Twitter feeds correlated to the value of the Dow Jones Industrial Average (DJIA) over

time. The algorithms he devised actually predicted the direction of the Dow Jones closing price
within 87.6% accuracy He discovered that the index rose over a few days of "calm" tweets and
dipped after a few days of more "anxious" feeling tweets (Readwrite). Investors can receive
information quicker from social media platforms, like twitter, than they do from traditional
finance news media. Social media platform puts pressure on these traditional finance media to
keep up. The problem is that social media information can be spontaneous and ironic. People can
post false rumors using Twitter with or without realizing that the information is bogus.
Paul Hawtin created Derwent Capital Management, the worlds first Twitter hedge
fund. The fund monitored company stock performance side-by-side with social media
"sentiment" and picked stocks based on its findings (Daily Finance). In one case, DCM showed
the relationship between Facebooks IPO and Twitter sentiments. From May 18 to August 17,
2012, Facebook stocks moved with Twitter sentiments. As sentiments dropped, so did the stock.
When sentiment rose, Facebooks stock prices also rose.
Conclusion
According to Intelligent HQ, a recent study by Arthur OConnor, a researcher at Pace
University that looked at statistics such as the number of Twitter followers, Facebook fans,
and YouTube page views for Nike, Coke, and Starbucks would appear to suggest a direct link
between these statistics and the share prices of those companies. In conclusion, we can tell that
social media has a huge impact on the financial market, but we have to be wary. Also, according
to Intelligent HQ, social media is like a guessing game and charts and graphs are subjective. A
tweet can also be twisted to make readers believe otherwise. The SEC is aware of the danger of

using social media for investing purposes it has issued numerous warnings and threatened
legal actions against any advisor who abuses the platform for their own financial gain.
It is safe to say that the impact of social media on the financial market will be more
pronounced in the future and it is important for everybody to understand the impact of the new
media in order for them to protect themselves against false rumors and learn to analyze
information received from new media.

Scholarly Sources
ENGELBERG, JOSEPH. "The Causal Impact of Media in Financial Markets." Rady University
of San Diego. The Journal of Finance, 06 Jan. 2011. Web. 7 Mar. 2013.
<http://rady.ucsd.edu/ faculty/directory/engelberg/pub/portfolios/MEDIA.pdf>.
Peress, Joel. "The Impact of the Media in Financial Markets:." Paris School of Economics, 14
Mar. 2011. Web. 7 Mar. 2013. <http://www.parisschoolofeconomics.eu/IMG/pdf
/jperess_1105.pdf>.
Other Sources
Bennett, Caroline. "Can Tweets and Status Updates Really Predict Stock Market Moves?"
DailyFinance.com. N.p., 1 Nov. 2012. Web. 07 Mar. 2013.
<http://www.dailyfinance.com /2012/11/01/stock-market-prediction-tweets-facebookstatus-updates/>.
Eler, Alicia. "How Social Media Is Changing The Stock Market." ReadWrite. N.p., 7 Dec. 2011.
Web. 07 Mar. 2013. <http://readwrite.com/2011/12/07/how_social_media_
is_changing_the_stock_market>.
Hamilton, Walter. "Facebook IPO Falls Short of the Hype." Los Angeles Times. Los Angeles
Times, 18 May 2012. Web. 07 Mar. 2013. <http://articles.latimes.com/2012/
may/18/business/la-fi-facebook-ipo-20120519>.
Hodgkins, Kelly. "How IPhone Rumors Affect Apple's Share Price." TUAW. N.p., 3 Sept. 2012.
Web. 07 Mar. 2013. <http://www.tuaw.com/2012/09/03/how-iphone-rumors-affectapples-share-price/>.
Milne, Paul. "How Social Media Is Affecting the Stock Market." Intelligent Head Quarters.
N.p., 01 June 2012. Web. 07 Mar. 2013. <http://www.intelligenthq.com/resources/howsocial-media-is-affecting-the-stock-market/>.
Victor, J. "How Does News Affect Stock Prices?" Weblog post. Share Market School How Does
News Affect Stock Prices Comments. N.p., 26 Oct. 2011. Web. 07 Mar. 2013.
<http://www.sharemarketschool.com/how-does-news-affect-stock-prices/>.
Wyk, Barry V. "Master Kong: How Internet Rumors Can Affect Share Prices." Danwei. N.p., 7
Mar. 2013. Web. 07 Mar. 2013. <http://www.danwei.com/master-kong-how-internetrumors-can-affect-share-prices/>.
The Week Staff |. "Facebook's IPO hype: Blame the media? - 5 June 2012. The Week. 10 Apr.
2013< http://theweek.com/article/index/228819/facebooks-ipo-hype-blame-the-media/>
Russolillo, Steven. "Apple Stock-Split Rumor Pushes Shares Higher." Wall Street Journal. 26
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