Social Media and Information Asymmetry in Capital Markets: Evidence from Wikipedia and Insider Trading



Investigating information asymmetry between insiders and outsiders in capital markets is economically important because it has implications on market efficiency. Prior literature has proposed three sources of information that uninformed traders can use: financial statements, analysts, and news. We examine the incremental impact of social media and use information arrivals on Wikipedia, a representative social media platform, to proxy for the informativeness of social media. We construct a data set of listed firms that had insider trades and had a Wikipedia entry in the 2002-2011 time frame. Using data of 8,586 observations (firm-months), we find that firm information arrivals on Wikipedia are associated with reduced profitability of the firm’s insider trading. A plausible interpretation is that social media reduce information asymmetry between insiders and uninformed traders, thus limiting insiders’ ability to trade profitably on private information. The finding is robust after we control for endogeneity and selection issues concerning information arrivals on social media.

About Michael Zhang

Michael Zhang is an Assistant Professor of Information Systems, Business Statistics and Operations Management at the Hong Kong University of Science and Technology.  He holds a PhD in Management from MIT Sloan School of Management, an MSc in Management, a BE in Computer Science and a BA in English from Tsinghua University.  Before joining the academia, he worked as a consultant for an investment bank, and as an international marketing manager for a high-tech company.  He holds a US patent, and started a social network company.  Professor Zhang’s research interests are on issues related to creation, dissemination and processing of information in business and management contexts.  His works study pricing of information goods, online word-of-mouth, online advertising, incentives of creation in open source and open content projects, and use of information in financial markets. His research has appeared in American Economic Review, Management Science, Journal of Marketing, MIS Quarterly, Journal of Management Information Systems, Decision Support Systems, and Journal of Interactive Marketing. He has also been actively involved in professional services, including serving as an Associate Editor for Information Systems Research, a Guest Associate Editor for MIS Quarterly,  and a member of the editorial boards ofProduction and Operations Management and Electronic Commerce Research and Applications.  He served as a co-chair for the 2011 China Summer Workshop on Information Management (CSWIM), as a track co-chair for PACIS 2010, ICIS 2012, and as a member of various program committees of academic conferences.

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