The Effect of Social Media on Market Liquidity

Recent studies have investigated the effect of investors’ opinions, or peer-based advice, available on social media platforms or stock discussion forums on the financial market. The researchers have been focusing on stock earnings surprises, abnormal returns and trading volume. But the jury is still out on when and how the discussion on social media impacts financial markets, especially market liquidity. For example, are social media platforms heterogeneous in the value they offer to investors? Further, we do not know if peer-based advice contains information that will be reflected by the market liquidity. We aim to shed light on these concerns by evaluating whether sentiments from messages on online discussion forums could influence the short sales activities in the Australian market. We employ textual analysis techniques to extract sentiments from these platforms. Practical implications for the markets have been discussed.