News or Noise? Internet Postings and Stock Prices

The anecdotal evidence is growing that postings in Internet financial forums affect stock prices, either because the postings contain new information or because they represent successful attempts to manipulate stock prices. From an investment perspective, knowing whether this phenomenon is pervasive is important. We examined the relationship between Internet message board activity and abnormal stock returns and trading volume in the period from mid-April 1999 to mid-February 2000. Our study focused on the RagingBull.com discussion forum, an extremely popular site whose format permits the construction of an objective measure of investor opinions. For stocks in the Internet service sector, we found that on days with abnormally high message activity, changes in investor opinion correlated with abnormal industry-adjusted returns. These event days also coincided with abnormally high trading volume, which persisted for a second day. However, we found that message board activity did not predict industry-adjusted returns or abnormal trading volume, which is consistent with market efficiency. Growing anecdotal evidence indicates that postings in Internet financial forums affect stock prices. Clearly, if forums such as message boards contain new information activity, they may help predict stock returns. Even in the absence of any value-relevant information, large numbers of investors may follow the buy and sell recommendations of message board users, thereby inducing deviations in prices from their efficient levels. Furthermore, day traders may recognize the momentum generated by investors who use message boards, thus exaggerating this effect. From an investment perspective, therefore, knowing whether postings affect prices is important. Researchers have begun to explore both the valuation of Internet stocks and the effects of Internet activity on equity valuation, but the focus has been on using accounting data or Web traffic to explain prices. In contrast, we examine directly whether the changes in opinions contained in Internet forums can predict stock returns and/or trading volume. Our study focused on the RagingBull.com discussion forum, an extremely popular site whose format permits the construction of an objective measure of investor opinion. We limited the analysis to stocks in the Internet service sector because they are natural candidates for the most discussion and thus most likely to be affected by information in Internet forums. We present both the event study and the vector autoregression analysis of the data that we carried out. The event study examined abnormal stock returns and trading volume around days with abnormal message board activity in the period from mid-April 1999 to mid-February 2000. An “event day” was defined as a day when the number of message postings exceeded the five-day moving average number of message postings by two standard deviations. The results show that days with strongly positive changes in message board opinions are preceded by a small abnormal increase in stock price. We also found that message board opinion and abnormal returns on the event day are related. We found little evidence, however, that opinion predicts future returns. Trading volume increased significantly on the event day and generally remained high for one day thereafter. The vector autoregression analysis examined whether daily returns, trading volume, the number of messages posted, and opinion can be used to predict these variables one day in the future. Consistent with the results from the event study, we found that it is not possible to predict returns using any of the variables. After controlling for the well-known effect that trading volume is positively related to the previous day's trading volume, we found message board activity to have no predictive power for trading activity. Our overall conclusion is that no causal link exists from message board activity to stock returns and volume. In fact, we found that it is market information that influences message board activity rather than the other way around. These results are completely consistent with market efficiency. They may also provide some comfort to investment professionals that the value of their portfolios may not be subject to the notoriously fickle opinions of the Internet community.