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Social Activity and Investors' Attention on Facebook

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Social Activity and Investors' Attention on Facebook Social activity and Investors’ attention on Facebook - A study exploring the relationship with stock returns Master’s Thesis For the attainment of Master of Science in Economics and Business Administration Applied Economics and Finance at Copenhagen Business School 2015 Authors: Lorenzo Bertolino Stefan Stronciu Supervisors: Ravi Vatrapu, Associate Professor Department of IT management Copenhagen Business School Lisbeth La Cour, Associate Professor Department of Economics Copenhagen Business School Hand-in date: 18th of December 2015 No. of pages: 78 No. of characters (incl. spaces):129’567 Abstract This thesis explores the role of social activity on corporate Facebook fan pages as a proxy for investors’ attention and its relationship with stock returns. Previous researches (Odean, 1999, 2008) proved that non-institutional investors tend to buy stocks that recently grabbed their attention. Starting from this concept we test if the amount of social attention directed toward a certain company is capable of affecting the market behavior of all the actors that trade its stock, that is, if it affects the stock returns of the specific company. Following the aforementioned researches we then narrow our focus on periods of abnormally high social activity and test if this positively impacts the net buying behavior of the market actors and consequently the stock returns. The focus will be on ten of the twenty companies included in the OMXC20 and their respective corporate Facebook fan page. We download from the latter the amounts of Posts, Comments and Likes that have been performed on a daily basis and by using a multiple distributed lag model, in which we also include economic and financial control variables, we try to disclose the existence of any relationship with the stock returns. The time periods analyzed vary for each company with a minimum of 964 observations/days for Maersk and 1458 observations/days for Havkatten (Jyske Bank). This study finds that there are few significant results that would indicate the positive effect of social attention on stock returns. Nonetheless, we are prudent about stating the validity of the efficient market hypothesis since there are plenty of other studies making solid arguments against it. It is important to highlight that the activity on the Facebook corporate fan page might be used to understand other phenomena, in particular the effect that a certain event has on stock returns. The authors believe that social attention will be more relevant in the future considering the increasing presence of social networks in society. 1 Table of Contents 1. Introduction ................................................................................................................................... 4 1.1. Purpose .................................................................................................................................. 4 1.2. Research Questions ............................................................................................................... 5 1.3. Hypotheses ............................................................................................................................ 5 1.4. Scope ..................................................................................................................................... 5 1.5. Motivation ............................................................................................................................. 6 1.6. Methodology ......................................................................................................................... 8 1.7. Criticism ................................................................................................................................ 8 1.8. Process Diagram .................................................................................................................. 10 2. Literature Review ....................................................................................................................... 11 2.1. Financial Theory of Stock Markets ..................................................................................... 11 2.1.1. The Efficient Market Hypothesis ................................................................................. 12 2.1.2. Anomalies and Criticisms to the EMHs ....................................................................... 13 2.1.3. Key Concepts of Behavioral Finance ........................................................................... 15 2.1.4. Investor Sentiment ....................................................................................................... 18 2.1.5. Why Social Attention Can Affect Stock Returns? ....................................................... 19 2.2. Methods for Stock Returns Prediction ................................................................................ 21 2.2.1. Simple and Multiple Linear Regression....................................................................... 22 2.2.2. Time Series Models ..................................................................................................... 23 2.2.3. Artificial Neural Networks........................................................................................... 24 2.3. Previous Researches with Social Data ................................................................................ 25 3. Methodology and Results ........................................................................................................... 27 3.1. Data Collection and Limitations.......................................................................................... 27 3.2. Econometric Model ............................................................................................................. 28 3.2.1. Deriving the OLS ......................................................................................................... 29 2 3.2.2. Assumptions and Specifications .................................................................................. 32 3.2.3. Variables ...................................................................................................................... 36 3.3. Data Wrangling and Sub Samples ....................................................................................... 40 3.3.1. Full Dataset .................................................................................................................. 42 3.3.2. Yearly Breakdowns ...................................................................................................... 42 3.3.3. Abnormal Social Activity ............................................................................................ 42 3.4. Results ................................................................................................................................. 44 3.4.1. Danske Bank ................................................................................................................ 45 3.4.2. Havkatten ..................................................................................................................... 47 3.4.3. Maersk .......................................................................................................................... 49 3.4.4. Nordea .......................................................................................................................... 51 3.4.5. Novo Nordisk ............................................................................................................... 53 3.4.6. Novozymes................................................................................................................... 55 3.4.7. Pandora......................................................................................................................... 57 3.4.8. TDC .............................................................................................................................. 59 3.4.9. Tryg .............................................................................................................................. 61 3.4.10. Vestas ........................................................................................................................... 63 4. Discussion of Findings ............................................................................................................... 65 5. Conclusion .................................................................................................................................. 76 6. Future research ............................................................................................................................ 77 7. Appendices ................................................................................................................................. 79 8. Bibliography ............................................................................................................................. 106 8.1 Articles and Books ................................................................................................................. 106 8.2 Internet sources....................................................................................................................... 110 3 1. Introduction This section is divided in eight sub points which will address the following matters: the purpose of the thesis along with the specific research questions and hypotheses; the data on which the analysis is based on, and the motivation that led us to choose this topic. The methodology
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