Do financial blogs serve an infomediary role in capital markets?

Abstract

Purpose – Financial blogs provide an online platform whereby retail investors effortlessly gain access to an abundant array of investment guidance. Prior studies find that the market reacts to financial blogs and similar online venues but results are inconsistent and financial blogs, a growing area in new media and distinct from other online venues, have received little attention. The purpose of this paper is to examine the particular conditions in which financial blogs serve an infomediary role in capital markets; when information asymmetry is high, earnings quality is low, and during economic uncertainty. These are conditions in which retail investors may seek easily accessible advice for their investment decisions. Design/methodology/approach – Abnormal returns for firms mentioned in blog posts on the SeekingAlpha.com financial blog are examined using a multivariate regression to determine whether or not the market reaction associated with these posts is related to information asymmetry, earnings quality, and economic uncertainty. Findings – Results indicate that abnormal returns are associated with the SeekingAlpha.com financial blog when information asymmetry is high and during bearish market conditions, and in particular when buy recommendations are posted on the blog for firms with high information asymmetry. This association is strengthened for firms with low institutional ownership, a proxy for unsophisticated or retail investors. Research limitations/implications – Results are based on a sample collected during a specific time period in order to detect whether financial blogs serve an infomediary role during uncertain market conditions. Practical implications – Results of this study can be useful to company executives who may want to monitor investment advice posted about their firm on financial blogs. Financial blogs and other forms of social media such as Twitter and Facebook are becoming the “new normal” in the investor information environment, a trend that is likely to continue. Originality/value – Financial blogs provide an abundance of supplemental information demanded by investors. Financial blogs represent a form of “new media,” now considered a key component of firms’ information environment (Saxton, 2012). In contrast to prior studies which primarily investigate only whether the market reacts to financial blogs or similar online platforms such as stock message boards, this study attempts to understand the specific conditions in which the market reacts to financial blogs. The results provide a rationale as to when and why investors rely on financial blogs and whether financial blogs serve an infomediary role in capital markets.