Online investment forum and the market response around earnings announcement in the Chinese stock markets

• Published date: 07 October 2019
• Date: 07 October 2019
• Pages: 615-631
• DOI: https://doi.org/10.1108/IJAIM-11-2018-0128
• Author: Qian Hao,Dayong Dong,Keke Wu

Online investment forum and the

market response around earnings

announcement in the Chinese

stock markets

Qian Hao

College of Business, Kutztown University, Kutztown, Pennsylvania, USA, and

Dayong Dong and Keke Wu

Department of Finance and Accounting, School of Economics and Management,

Southwest Jiaotong University, Chengdu, China

Abstract

Purpose –This paper aims to study the following two questions. Do earnings announcements stimulate

investors to participatein online discussions? Doesonline investment forum participation affect the market’s

reactionto earningsnews?

Design/methodology/approach –The authors collect all the online posts, which were related to

the internet service companiesand posted in a Chinese f‌inancial forum, guba.eastmoney.com (Guba), during

the period betweenJune 30, 2008 and December 31, 2015. Multiplelinear regression analysis is usedto test the

questions.

Findings –The study f‌inds that the earningsannouncements induce online discussion.In addition, before

the earnings announcement, online posting activity does not affect earnings response coeff‌icient but can

weaken the positive association between the magnitude of the upcoming earnings surprise and abnormal

trading volume. In contrast, after the earnings announcement, online forum participation can facilitate the

incorporationof earnings surprise into the price.

Originality/value –This study contributesto the literature studying the impact of social media on market

reaction to earningsnews by providing evidence that the price discovery process can be affectedby the online

investmentforum. Several policy implications are also provided.

Keywords Earnings announcement, Market response, Online investment forum

Paper type Research paper

1. Introduction

The exponential growth of social media has signif‌icantly changed the way that capital market

participants collect, disseminate and process information. Different from the traditional

information channels, online forum is an intensively interactive and participatory form of

media that rely heavily on user-generated content and bottom-up knowledge generation

(O’Reilly, 2007). Investors are one of the key producers of online information (Saxton, 2012).

Online postings, as a new tool for the markets to acquire, process and spread information, has

captured a lot of interest. Saxton (2012) calls for more understandingof the specif‌icconditions

that spark online information seeking and generation. Miller and Skinner (2015) identify

The authors thank Maggie Liu (the editor), and the anonymous referees for their helpful comments.

This research acknowledges the support by the National Natural Science Foundation of China (Grant

NO. 71271174; NO. 71773100; NO. 71862003).

Online

investment

forum

615

Received2 November 2018

Revised4 January 2019

Accepted15 January 2019

InternationalJournal of

Accounting& Information

Management

Vol.27 No. 4, 2019

pp. 615-631

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-11-2018-0128

The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/1834-7649.htm

important evolving themes in disclosure literature and argue that “social mediaseems like an

important new strand of the literature given [...] the potential for users to create and

disseminate their own content [...]aboutf‌irms.”Inaddition, Coyne et al. (2018) emphasize the

importance of big data information in the accounting profession. Our paper studies whether

the stock board messages affect the incorporation of earnings surprises into market price. Our

primary goal is to assess the extent to which online posting activity affects the markets’

reaction to earnings news. Our analysis provides an initial step toward understanding the

followingtwo questions:

(1) Do earnings announcements stimulate investors to participate in online

discussions?

(2) Does online discussion participation have information content or not? We

investigate whether online forum activity affects the stock price reaction and

trading reaction to the earnings announcement.

We collect all the posts about 19 internetservice companies from an online f‌inancial forum,

guba.eastmoney.com (Guba), in China. Our collection period is from June 30, 2008 to

December 31, 2015. We f‌ind that investors are more likely to create posts on the forum

starting three days before, and ending one day after quarterly earnings announcements,

indicating that earnings releases stimulate interest in online searching and disseminating

information. The stock message board has some information content because the online

posting activity is associated with the earnings response coeff‌icient, after the earnings

release.

This paper combines two strands of research. One is the impact of earnings

announcement in the capital markets. There has been a plethora of research documenting

that earnings announcementsaffect security prices in a systematic manner (Ball and Brown,

1968;Beaver, 1968;Collins and Kothari, 1989;Francis et al.,2002). The other branch of

research examines how various channels of information dissemination affect the market

reaction to earnings surprises. Engelberg (2008) provides causal evidence that newspaper

coverage can alter the market’s responseto earnings surprises. Curtis et al. (2014) argue that

more active social media participation is associated with stronger market reaction upon

earnings releases. Bartov et al. (2018) f‌ind that aggregated individual opinions on Twitter

can predict a f‌irm’s forthcomingquarterly earnings and announcement returns.

This paper is most related to Drake et al. (2012).Drakeet al. (2012) examine factors that

inf‌luence investor information demand around earnings announcement and shed light on

how investor informationdemand, expressed through internet searches, impactsthe market

response to earnings news. Both papers studyhow social media affects the incorporation of

earnings news into stock prices, but are differentin the following aspects. First, Drake et al.

(2012) focus on investors’Google searches. Our paper studies the role of online investment

forum participationin the markets. Google searches ref‌lect information demand. In contrast,

online forum participation is much broader, including information demand, creation,

exchanges and even misleading or misuse. Second, the results are different. Drake et al.

(2012) suggest that more active Google searching prior to the earnings announcement can

speed up the price discovery, as preannouncement return and volume change ref‌lect moreof

the upcoming earnings surprises, and the price and volume response upon the release of

earnings become weaker. Our results propose that during the pre-announcement period,

online forum participation does not affect the incorporation of upcoming earnings surprises

into the price but can weaken the positive association between earnings surprises and

abnormal trading volume. In contrast, after the earnings announcement, online forum

participation can facilitate the incorporation of earnings surprises into the price. The

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