Review of Corporate Finance > Vol 2 > Issue 1

We Reddit in a Forum: The Influence of Message Boards on Firm Stability

Shaen Corbet, DCU Business School, Dublin City University, Ireland, and School of Accounting, Finance and Economics, University of Waikato, New Zealand, shaen.corbet@dcu.ie , Yang (Greg) Hou, School of Accounting, Finance and Economics, University of Waikato, New Zealand, Yang Hu, School of Accounting, Finance and Economics, University of Waikato, New Zealand, Les Oxley, School of Accounting, Finance and Economics, University of Waikato, New Zealand
 
Suggested Citation
Shaen Corbet, Yang (Greg) Hou, Yang Hu and Les Oxley (2022), "We Reddit in a Forum: The Influence of Message Boards on Firm Stability", Review of Corporate Finance: Vol. 2: No. 1, pp 151-190. http://dx.doi.org/10.1561/114.00000014

Publication Date: 02 Mar 2022
© 2022 S. Corbet, Y. Hou, Y. Hu and L. Oxley
 
Subjects
Asset pricing,  Corporate finance,  Derivatives,  Financial markets,  International business: International finance and investment,  Asymmetric information,  Imperfect information,  Behavioral economics,  Behavioral finance,  Psychology,  Regulation
 
Keywords
JEL Codes: G12, G13, G14, G41
Market activityliquidityvolatilitypump-and-dumpmanipulationmessaging boards
 

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In this article:
Introduction 
Theoretical Development 
Data 
Methodology 
Empirical Results 
Conclusions 
References 

Abstract

The use of messaging boards to instigate coordinated manipulation of stock prices is not a novel phenomenon. However, the growing breadth and sophistication of social media, the widespread availability of technological cloaking techniques, and the ready accessibility of leveraged derivatives have all significantly contributed to the growth of the infamous Reddit forum r/wallstreetbets. Using a lexicon of terminology designed to identify explicit and implicit manipulation attempts, this research presents several novel findings. The results indicate significantly positive, pronounced, and persistent abnormal returns in the aftermath of manipulative events, with the results being robust across several testing procedures. These abnormal returns have increased significantly in line with the growth of forum users and the reach of manipulation-related comments. Significant effects on market liquidity and analyst recommendations are further identified across tests. Such continued predatory headwinds are certainly of interest to market-makers, regulators, and policymakers alike, as the irrational exuberance incited by millennial meme stocks and sarcastic GIFs is found to have played a significant role in disrupting market functionality. The desired outcome of some of these five million monthly forum users is to create enough momentum to trigger algorithmic responses to move out-of-the-money options into a profitable state. Our results present evidence that this potential threat to corporate stability is concrete.

DOI:10.1561/114.00000014