Place your bets? The market consequences of investment advice on Reddit's wallstreetbets

Abstract

We examine the market consequences of due diligence (DD) reports on Reddit’s Wallstreetbets (WSB) platform. We find average ‘buy’ recommendations result in two-day announcement returns of 1.1%. Further, the returns drift upwards by 2% over the subsequent month and nearly 5% over the subsequent quarter. Retail trading increases sharply in the intraday window following publication, and retail investors are more likely to be net buyers following reports that earn larger returns. Thus, in sharp contrast to regulators concerns that WSB investment advice is harming retail traders, our findings suggest that both WSB posters and users are skilled.

Also of interest...

Our sample includes 2,340 DD reports issued between 2018 and 2020.

We find ‘buy’ DD recommendations (~80% of all DD reports) earn two-day abnormal returns of roughly 1.12% percent. These returns are statistically significant and economically large, albeit smaller than the average returns to sell-side analyst recommendations, but substantially larger than the returns to Seeking Alpha recommendations. We do not however, find significant abnormal returns to ‘sell’ recommendations.

We next examine if this price movement is transitory (e.g., due to short-term uninformed price pressure) or permanent. We fail to find any evidence of reversals. In fact, the returns continue to drift in the same direction over the next month. For instance, we find Day returns of 1.45%, which are highly statistically and economically significant. Further, the cumulative one-quarter return following buy DD recommendations exceeds 6%.

The results for this subset of non-confounded DD reports remain highly significant and are of similar economic magnitude. In other words, WSB posters ability to forecast future stock returns is not limited to piggybacking off other information events.

Collectively, our evidence suggests that 1) WSB DD posters have skill and 2) retail investors may have some ability to discern report quality. Our evidence is in sharp contrast to the conventional view that WSB only attracts uninformed investors and to regulators fears that following the advice of user reports on WSB results in significantly less informative retail trading.

All of this predates the gamestop apocalypse, of course. I'd be curious to see if this trend held out when they were dealing with half a million active users at once. This report is more about the quiet not-yet-noticed era of /r/wallstreetbets and that era ended.