It’s easy to have your head turned by what you read online, but a new study shows the danger of buying into ‘hot’ companies or sectors.
Investors can be manipulated by digital media to overpay for promoted shares. That’s the finding of new academic research conducted on both sides of the Atlantic — but there is nothing theoretical about the risk of people being misled about stocks. Last weekend US investigators accused the UK stockbroker Beaufort Securities of a “pump and dump” fraud, which involves promoting shares to boost demand and prices before cashing in as clients buy. (City regulators have closed the firm, freezing nearly £800m placed with it.)
The research, carried out in London and Boston and exclusively revealed to The Sunday Times, shows how prominent placings on Yahoo! Finance can affect investors’ decisions.
Thousands of website users and more than 300 company announcements were scrutinised to reveal how share prices were boosted by the way in which financial news was presented. Alastair Lawrence of London Business School told me: “A key takeaway from our research is to be wary of ‘hot’ stocks and sectors. So don’t follow the herd, but be sure to look for good reasons to invest.”
James Ryans, also of London Business School, added: “Selecting stocks which are attracting a high level of attention could mean you get a lower return on your investment.”
Their field study assessed the share prices of 169 companies making earnings announcements over the course of 11 weeks. These businesses were randomly selected to have news articles about them shown to financial website users; another 169 companies, selected from a total group of more than 1,134, were selected to serve as a control sample.
The effect of media attention on share prices was found to be more pronounced for smaller companies — sometimes called “penny shares” — and those that normally keep a low profile.
- 1,134 Companies studied to see the impact of media attention on their share price
- 2% Typical boost to share prices when news was placed on Yahoo! front page
On the day of the earnings announcements, media articles for the random sample were given prominent positioning on the front page of Yahoo! Finance to a 1% sample of users, typically boosting share prices by 2%. ……
…… As I have pointed out here before, regulatory requirements for the disclosure of financial information can have unintended consequences — and more really may mean less. Long documents, even those marked “Important,”, are often ignored by busy people.
Many reports and accounts may tick all the corporate lawyers’ boxes but be read by very few shareholders. The 24-hour news cycle can also present hazards for investors, as …… Alan Steel explained: “We live in an age of information overload and knowledge deficiency. How many times a day do you think Warren Buffett, one of the world’s most successful investors, looks at his smartphone? I’d be amazed if he has any hand-held device apart from his regular cherry Coke.” ……
…… Closer to home, common sense remains the best protection against fraud and negligent misinformation. Investors should always ask themselves, “Who benefits?,” before parting with money.
Steel advises people to do their homework, reading widely to identify profitable trends and to “ignore the noise online.” It’s a case of new technology, same old human nature.