Are financial bloggers well informed and do they actually do a decent job of providing valuable market analysis and making accurate predictions? Or are financial bloggers hyperbolic spin machines that exaggerate the news?

The answer is yes, and yes, according to a new academic study: Guru Dreams and Competition: An Anatomy of the Economics of Blogs.

The study was authored by: Yi Dong of the University of International Business and Economics in China; Massimo Massa, The Rothschild Chaired Professor of Banking, Co-Director of the Hoffmann Research Fund, Professor of Finance at INSEAD in Singapore; and Hong Zhang, Associate Professor of Finance at PBC School of Finance, Tsinghua University. The study analyzed the content of blogs covering stocks from 2006-2011.

Economic blogs provide a low barrier to entry

Blogs provide experienced industry practitioners and non-professional amateurs a low barrier to entry. Bloggers can use social media to achieve “speedy public diffusion” of information and gain “guru status.” In theory, blogging allows individuals to become salient and to attract public attention in a way that was not possible with the traditional media.  However, in practice public attention is concentrated on a very small fraction of bloggers, the study noted, with the distribution of public attention for blogs being highly skewed.

To determine if bloggers are informed or whether they “simply rely on cheap talk to attract attention,” the researchers conducted various tests to see if in fact the bloggers were knowledgeable. Then they considered the impact competition has on hyperbolic presentation of information.

Tone difference between the economic blogs and the top four largest newspapers

In its study, the researchers compared the “tone difference” between the blogs and the top four largest newspapers in the U.S. and determined that “bloggers do disseminate information above and beyond what public media provides,” supporting “the informed guru hypothesis” rather than the “cheap-talk hypothesis,” the report noted.

The study then considered the impact competition has on blogging. Their intuition told them that competing bloggers would likely resort to “sensational” pieces of information and highly extreme opinions to attract public attention.  Their finding? The increase in the competition “significantly amplifies the impact of competition for both negative tone and tone difference and renders the tone more extreme.”

This led the researchers to conclude that “bloggers are informed and that they are generally able to predict risk-adjusted stock performance, suggesting that social media can supply information above and beyond public media.” However, competition among bloggers and on social media “leads to more exaggerated negative tone.” This more dramatic tone does little to help the predictive power of the blog, and implies “that competition in social media distorts information,” giving it a more negative skew.  At the end of the day, “competition improves the accuracy of information supplied by analysts,” but competition also leads to more negative news coverage.

To read the full study click here.

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