Short Sellers in the Realm of Social Media: Arbitrageurs or Manipulators?

Abstract

We study the interaction of short sellers and social media and the effect on stock prices. We use 75.1 million investment-related social media posts for 3,683 unique Chinese firms. Prior to high short interest, social media tone is abnormally positive. Once highly shorted, the tone flips and is abnormally negative. No such pattern exists with traditional media. Compared to firms that are just highly shorted, highly shorted firms with pump-and-dump patterns in social media tone have abnormal returns that are 2.7x higher before, and 3x lower after, the initiation of high short interest. Evidence from natural experiments involving China’s introduction and subsequent suspension of shorting also suggest social media manipulation. Manipulation is more likely in firms located in provinces with weaker legal environments. Our findings show that in the realm of social media, short sellers may profit more by creating mispricing than by correcting it.