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Information content of web-based stock ratings: the case of Motley fool CAPS data

Information content of web-based stock ratings: the case of Motley fool CAPS data The purpose of this paper is to answer a fundamental question – are individual stock picks by a particular internet investment community informative enough to beat the market? The author observes that the stock picks by the CAPS community are reflective of existing information and portfolios based upon CAPS community stock rankings do not generate abnormal returns. The CAPS community is good at tracking existing performance but, it lacks predictive ability.Design/methodology/approachThe study uses a unique data set of stock ratings from Motley Fools CAPS community to determine the information content embedded in these ratings. Observing predictive ability of this web-based stock ratings forum will raise questions about the efficiency of the financial markets. The author forms stock portfolios based on stocks’ star ratings, and star rating changes, and test if the long-short portfolio strategy generates significant α after controlling for single, and multi-factor asset pricing models, such as Fama-French three-factor model and Carhart four-factor model.FindingsThe paper finds no evidence that the CAPS community ratings contain “information content,” which can be exploited to generate abnormal returns. CAPS community ratings are good at tracking existing stock performance, but cannot be used to make superior forecasts to generate abnormal returns. The findings are consistent with the efficient market hypothesis. Furthermore, the author provides evidence that CAPS community ratings are themselves determined by stock performance rather than the other way around.Originality/valueThe study employs a unique data set capturing the stock ratings of a very popular web-based investment community to evaluate its ability to make better than random forecasts. Besides applying well-accepted asset pricing models to generate α, the study conducts causality tests to discern a causal relation between stock ratings and stock performance. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Advances in Management Research Emerald Publishing

Information content of web-based stock ratings: the case of Motley fool CAPS data

Journal of Advances in Management Research , Volume 15 (3): 18 – Jul 25, 2018

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
0972-7981
DOI
10.1108/jamr-02-2018-0025
Publisher site
See Article on Publisher Site

Abstract

The purpose of this paper is to answer a fundamental question – are individual stock picks by a particular internet investment community informative enough to beat the market? The author observes that the stock picks by the CAPS community are reflective of existing information and portfolios based upon CAPS community stock rankings do not generate abnormal returns. The CAPS community is good at tracking existing performance but, it lacks predictive ability.Design/methodology/approachThe study uses a unique data set of stock ratings from Motley Fools CAPS community to determine the information content embedded in these ratings. Observing predictive ability of this web-based stock ratings forum will raise questions about the efficiency of the financial markets. The author forms stock portfolios based on stocks’ star ratings, and star rating changes, and test if the long-short portfolio strategy generates significant α after controlling for single, and multi-factor asset pricing models, such as Fama-French three-factor model and Carhart four-factor model.FindingsThe paper finds no evidence that the CAPS community ratings contain “information content,” which can be exploited to generate abnormal returns. CAPS community ratings are good at tracking existing stock performance, but cannot be used to make superior forecasts to generate abnormal returns. The findings are consistent with the efficient market hypothesis. Furthermore, the author provides evidence that CAPS community ratings are themselves determined by stock performance rather than the other way around.Originality/valueThe study employs a unique data set capturing the stock ratings of a very popular web-based investment community to evaluate its ability to make better than random forecasts. Besides applying well-accepted asset pricing models to generate α, the study conducts causality tests to discern a causal relation between stock ratings and stock performance.

Journal

Journal of Advances in Management ResearchEmerald Publishing

Published: Jul 25, 2018

Keywords: Asset pricing; Efficient market hypothesis; Information content of stock picker ratings; Web-based investment community

References