Information shock, market reaction, and stock message board information diffusion

Abstract

We investigate the market reaction to information shocks in the Chinese stock market and study the process of information diffusion among investors on the stock message board. We find that investors tend to overreact to information shocks and the communications on the stock message board facilitate this overreaction. Further analysis shows that stock market overreaction is more significant in response to small and medium-cap shocks, and the degree of overreaction decreass with increasing liquidity. Our empirical results provide significant evidence of how information spreads among retail investors from the perspective of investor overconfidence and information asymmetry.