Communication scholars have produced a large body of work on the acquisition of knowledge (see, e.g., Hwang & Jeong, 2009). Far less attention has been directed toward exploring knowledge production (see Wei, 2009 for an exception), despite the fact new media have unleashed a dramatic increase in individuals’ capacity to produce and disseminate knowledge. There is thus a pressing need to explore the nature, and particularly, the effects of such decentralized information production at all levels of society. The current study addresses this critical void in the literature by addressing the following question: Above and beyond the effects of traditional media, do blogs influence aggregate levels of knowledge?
To answer this question, this study focuses on the stock market, a unique setting that renders it possible to test the cumulative effects of information produced by a given medium. The authors posit that, in the aggregate, financial blogs produce valuable information that serves to mitigate the harmful information asymmetries that plague the stock market and impair market fairness. The specific focus is on the information asymmetry that typically exists between firm “insiders” (executives and members of the board) and average investors, or “outsiders.” The core hypothesis is that knowledge produced by financial bloggers can decrease the information asymmetry between firm insiders and outsiders, and thus limit insiders’ ability to profitably trade on privately held information. This hypothesis is tested using blogging data on 150 top financial blogs and corporate insider trades on the firms of the S&P 500 index.
This study makes several contributions to the literature. It is the first in any field to examine the impact of new media on information asymmetry, and is one of only a handful of studies on the capital markets (the bond and stock markets) in the field of communication (Davis, 2005; Scheufele, Haas, & Brosius, 2011; Zwick, 2006). Given how the markets fluctuate according to investors’ reactions to newly acquired firm-specific information, the capital markets represent a uniquely promising venue for investigating macro-level outcomes of information production and dissemination. In fact, such markets are an ideal setting in which to get a reliable, numerical indicator (e.g., change in trading price and volume) of the cumulative effects of information generated through a given communication channel. In addition, the current paper meets Wildman’s (2008) call for greater integration of the communication and economics fields, refining and introducing several financial economics-related concepts to a communication audience. The study also offers a unique test of the societal-level effects of blog-based information production that extends work on the “leveling” effects of new media (e.g., Maratea, 2008; Woodly, 2008).
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Information Asymmetry, Insider Trading Profits, and Media Messages
Information asymmetries occur when parties to an exchange possess unique or varied information. Such asymmetries are prominent in a variety of communication contexts, such as
between sellers and buyers in bargaining and negotiation scenarios, healthcare providers and patients in the context of medical decision-making, and criminal suspects and law enforcement
agents engaged in deception detection (see Wildman, 2008; for more examples, see Levitt & Dubner, 2005). In each of these scenarios, one party is privy to uniquely held information. As the alternate party is disadvantaged by this knowledge disparity, information asymmetries are
generally seen as detrimental (see Wildman, 2008). Real-world examples of information asymmetries are common, as with an employee knowing more about her actual workload than her manager, a doctor knowing more about the cost and trade-offs of a treatment option than her patient, a realtor knowing more about prices than a home seller, or a corporate insider knowing more about her company’s prospects for future profitability than an average investor. This study proposes that aggregate content produced by financial bloggers can decrease the information asymmetries that obtain between corporate insiders – the firm’s executives, board members, and large shareholders – and average investors.
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