A Penny Is Worth a Thousand? Investigating the Relationship Between Social Media and Penny Stocks

Abstract

Increasingly more investors are seeking information from social media to help make investment decisions. Considering that information on penny stocks is often less reported in traditional media, investors may rely more on social media to obtain such information for investment advice. Although previous research has shown that stock opinions in traditional media is a possible predictor of stock returns, no previous research has considered the effect of the stock opinions in social media on these stocks in terms of future stock performance and the moderation effect of penny stocks. In this research, we studied the relationship between social media and the financial performance of penny stocks. We used the net proportion of positive words in stock articles in social media to help predict the future stock performance for penny stocks. The moderation effect of penny stocks on the net fraction of positive words was found to be significant in short terms, revealing a stronger relationship between social media and stock performance at lower price and market capitalization (MC) levels. Based on the findings, we proposed simple strategies utilizing social media and our measure. The results of our applications will be of interest to individual and institutional investors, shareholders, and regulators.