Social Interaction and Market Reaction to Earnings

Using Facebook Social Connectedness Index to identify the network centrality of a firm based on its headquarter location, we study how information propagates through social network and affects asset prices. We find that earnings announcements made by central firms attract more attention from both retail and institutional investors, generate stronger immediate reactions in prices, trading volume and return volatility, and weaker post announcement drifts. In addition, these announcements are followed by less persistent volatility but more persist investor attention and volume, especially disagreement-driven volume. Our evidence suggests a dual role of social interaction: it promotes information efficiency by facilitating public information diffusion, but also induces investor disagreement and excess trading volume.