One of the overriding questions from the 2016 presidential campaign is whether the onslaught of “fake news” altered the outcome of the election. That question is unanswerable, but we now know whether the financial equivalent of fake news altered stock prices.
[timeless]
Q2 hedge fund letters, conference, scoops etc
In early 2017, the SEC took action against a number of web sites, including Seeking Alpha, after it uncovered a large number of articles that contained false information and were posted to prop up the stock prices of the underlying companies. A just-published research study, Fake News, Investor Attention, and Market Reaction, showed that those articles succeeding in driving traffic and raising awareness of the companies.
But it showed that investors were smart enough to disregard the information. There was no discernable increase in the share prices of the companies.
The immediate takeaway is that the market was sufficiently efficient and investors were adequately discerning so that this type of fake news did not pose a threat to you or your clients’ assets. But, as I will explain, there are other lessons about whether one can rely on crowdsourced information sites, such as Seeking Alpha, for accurate information.
First, however, let’s review what led to the SEC’s actions and what the researchers found.
C-list actress turned equity analyst
Kamilla Bjorlin is an actress from Encino, California, who performs under the name Milla Bjorn. She has had minor parts in a few obscure movies. But as a second career, she ran Lidingo Holdings LLC, which, over a two-and-a-half year period between 2011 and 2014 paid writers to generate hundreds of stories extolling the virtues of companies such as Advanced Medical Isotope Corp. (ticker: ADMD) and Galena Biopharma, Inc. (ticker: GALE).
Public companies are allowed to use, for example, public relations firms to promote their interests. But in this case, Bjorlin (who wrote many of the articles herself) and her writers failed to disclose that they were being paid by the company.
This came to light in April 2017, when the SEC announced a settlement with Bjorlin’s firm and 16 others for engaging in deceptive stock promotion. The cases were settled for amounts ranging from $2,200 to $4.8 million.
The settlement cited roughly 450 articles that appeared on a number of sites, including Benzinga, Forbes, Investor Village, Minyanville, Small Cap Network, The Motley Fool, TheStreet and Yahoo Finance. But, by far, the greatest number appeared on Seeking Alpha.
None of the web sites were charged by the SEC – only the authors, their employers and some of the companies that paid for their services. Indeed, the complaint did not state that the sites were aware that the authors were paid promoters. It was the failure to disclose their affiliation with the underlying companies that broke the law.
Four researchers – Jonathan Clarke, Hailiang Chen, Ding Du, and Yu (Jeffrey) Hu – authored the above study. They were provided data by Seeking Alpha and studied only the stories posted on that site.
Fake news generated a lot more readership than legitimate news (about 82% more page views), according to the authors. Moreover, visitors to the site could not distinguish what was real from what was fake. There was no statistically significant difference between the number of comments on real and fake articles, and the comments on the fake articles did not contradict the article any more than in a control sample.
Those findings are illustrated in the following graphs, which appeared in the study. They show that fake news attracted more attention than real news, based on the number of page views, unique visitors, whether the article was read to the end and whether the comments on the article were read.
Read the full article here by Robert Huebscher, Advisor Perspectives
