Nonlocal Disadvantage: An Examination of Social Media Sentiment

Abstract

Twitter posts covering 1,082 firms from November 2008 to June 2011 reveal that sentiment in nonlocal Twitter posts is negatively related to future returns, and this negative relation is due to nonlocal posts favoring overpriced stocks, which earn lower subsequent returns. In contrast, local posts do not exhibit this failing. Since nonlocal posts dominate social media, this result highlights the danger of a naive reliance on social media sentiment. The nonlocal disadvantage is larger for firms without public news and firms with higher information asymmetry, suggesting that richer information constrains the exuberance of nonlocal investors.