New study finds Wallstreetbets tips have declined in predictive value since 2021

Discover how the Gamestop event altered the culture of WSB, affecting investment quality and smaller investors. Study shows Wallstreetbets' influence post-2021.

“Our findings are consistent with the view that the Gamestop event altered the culture of WSB, leading to a deterioration in investment quality that adversely affected smaller investors.”

A new study published on December 23 in Oxford Academic’s The Review of Financial Studies looks at the impact of Reddit’s Wallstreetbets on the stock market, covering a period from 2018 to 2021.

It finds that while the subreddit’s investment discussions on stock prices and market trends still have a sizeable influence, there was a notable shift post-2021, particularly after the Gamestop event.

The researchers suggest that the surge in Wallstreetbets’ user base led to a decrease in the quality and usefulness of its investment advice.

Wallstreetbets: A Digital Stock Market Phenomenon

Wallstreetbets, a subreddit on the popular social media platform Reddit, has emerged as a significant force in the financial world.

Originating as a space for casual discussions about stock trading, it has evolved into a community where millions of members share investment strategies, tips, and analyses.

Known for its informal language and meme-driven culture, Wallstreetbets gained global attention during the Gamestop saga in early 2021, when its members collectively drove up the stock’s value, showcasing the community’s collective power to influence the stock market.

Examining five thousand due diligence reports

The current study analyzed 5,050 due diligence (DD) reports from Wallstreetbets, posted between July 2018 and June 2021.

These reports were examined for their correlations with stock market movements.

This included tracking stock prices, trading volumes, and market reactions in relation to the timing of the DD posts.

The researchers aimed to quantify the tangible effects of these online discussions on actual market changes, offering insights into how retail investor sentiments on Wallstreetbets correlate with stock market dynamics.

Key Findings: Wallstreetbets’ Influence on Market Dynamics

The study’s key findings reveal how Wallstreetbets’ posts impacted stock prices and market dynamics, particularly when comparing the periods before and after the Gamestop event (GME) in early 2021.

Before the Gamestop event, when Wallstreetbets users posted a positive recommendation about a stock within 5 days before its earnings were announced, there was a 5.4% greater chance that the stock would perform better than what financial analysts expected.

This was a significant increase, about 10% higher than the usual expectations.

But after the Gamestop event, the situation changed dramatically.

The study found that the positive influence of Wallstreetbets’ recommendations on stock performance significantly decreased.

In fact, the data from 2021 showed that these recommendations were no longer reliable predictors of a stock’s success.

In some cases, such as with earnings forecasts, following Wallstreetbets’ advice after the Gamestop event could even lead to negative outcomes, indicating a complete reversal from their earlier predictive success.

Conclusion

The study found that “prior to the GME short squeeze event, WSB was a source of valuable investment research,” with DD reports positively forecasting one-month ahead returns, particularly when commenters agreed with the report.

WSB research was also found to positively forecast media sentiment, earnings surprises, and earnings forecast revisions, indicating that “WSB research contained useful information about future cash flows news.”

But post-Gamestop, the influx of new users led to a significant deterioration in the informativeness of WSB research.

This change, characterized by a tenfold increase in WSB users, resulted in the “elimination of all the above benefits” in the post-GME period (January 2021 – June 2021).

The researchers suggest that this surge in attention and user base negatively impacted the platform’s value for less sophisticated investors.

From a regulatory perspective, the study suggests that the negative impact of WSB on financial markets appears to be modest.

Despite concerns that WSB might be harming small investors, there is “little evidence to suggest that DD reports are resulting in a significant decline in retail trade informativeness, even in the post-GME period.”

The authors conclude that “the declining informativeness of WSB research in the post-GME period should provide caution to the 10 million WSB subscribers who turn to WSB for investment research.

Indeed, our evidence casts doubt on the view that simply following all DD report recommendations will generate significant abnormal returns going forward.”

But, they add, “WSB may still be a useful source of value for investors who are adept enough to discern between higher and lower quality WSB research.

Identifying the attributes of WSB associated with better performance, particularly in the post-GME period, is a potentially interesting area for future research.”

Study details

  • Title: Place Your Bets? The Value of Investment Research on Reddit’s Wallstreetbets
  • Authors: Daniel Bradley, Jan Hanousek, Jr., Russell Jame, Zicheng Xiao
  • Journal: The Review of Financial Studies
  • DOI: https://doi.org/10.1093/rfs/hhad098
  • Publication Date: 21 December 2023