Olympic Euphoria and Social Media: An Analysis of Firms Involved in the Olympics

Abstract

We investigate the equity valuation effects of social media websites during one of the world’s largest events: the Olympics. Using listings of Olympic-firms posted on Chinese social media websites in the years leading up to the Olympics, we identify those firms that are publicly labeled and discussed in chat-rooms as theme — firms that are expected to be either directly or indirectly involved in the Olympics. We find a correspondingly large increase (between 30 and 80 percent) in the valuation of Olympic stocks relative to other Non-Olympic stocks in the years prior to the Olympics and a large reversal in valuation during the actual Olympic year. Our analysis of underlying fundamentals reveal that Olympic stocks do not generate excess cash flows or earnings sufficient to justify the price increases either pre or post the Olympics. Moreover, we find the greater over-valuation of Olympic firms does not appear to be explained by greater news coverage in traditional media outlets (newswires and press releases). Our results suggest that social media websites are likely to be one forum used by retail investors to identify stocks in which to invest. However, when retail investors are influential on prices, a consequence of this naive investment strategy appears to be a greater potential for mispricing.