Seeking Alpha as a Predictor of Stock Movements and Earnings Surprises

by: Hailiang Chen

We, Professors Prabuddha De, Yu (Jeffrey) Hu, and Byoung-Hyoun Hwang, and doctoral student Hailiang Chen, are researchers at Purdue University. We set out to answer the questions:

  • Do articles on Seeking Alpha, the leading financial social media website, contain quantifiably valuable information for investors?
  • Is Seeking Alpha more or less valuable for investors than traditional media outlets, such as the Wall Street Journal?

We conducted textual analysis to extract sentiments from articles published on Seeking Alpha and in the Wall Street Journal from 2006 to 2010 and compared their impacts on the returns of over 2,800 U.S. common stocks.

Our key findings were:

  1. Social media sentiment extracted from Seeking Alpha articles has a stronger association with contemporaneous and future stock returns than traditional media sentiment in the Wall Street Journal.
  2. Social media sentiment embodied in Seeking Alpha articles is more successful at predicting future earnings surprises.
  3. The relationship between social media sentiment and stock returns is stronger for stocks that are primarily held by retail investors and for articles that receive more comments on Seeking Alpha.
  4. Over the study’s sample period, a trading strategy that goes long stocks with the most positive sentiment and short stocks with the most negative sentiment on Seeking Alpha would have generated returns of 0.40% a day or 8.31% a month. The corresponding strategy utilizing traditional media sentiment from the Wall Street Journal yields a return of 0.29% a day or 5.96% a month. These numbers, of course, ignore transaction costs.

Together, our findings suggest that the market opinion and analysis from the over 3,000 contributors featured on Seeking Alpha provide useful information beyond the financial news coming out of mainstream media outlets. Our full working paper outlining our findings is here: Sentiment revealed in social media and its effect on the stock market.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Editor's note: After completing their research, Hailiang and his team reached out to us to share the results. Seeking Alpha did not commission the study, and had no influence on its composition, results or conclusions.

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