The Rise of the Finfluencer
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The information ecosystem of today’s stock markets is changing. Retail trading increasingly affects stock price movements, social media shapes investing trends, and non-traditional entities mediate information. Understanding these shifts requires answering the following question: who, or what, drives investing decisions today? In a new Article, I argue that stock market influencers, or ‘finfluencers,’ increasingly do, and elucidate the impact of finfluencers on information and price discovery in stock markets.
The term ‘finfluencer’ refers to a person or entity that has outsize impact on investor decisions through social media influence. Various types of finfluencers exist, ranging from celebrities such as Kim Kardashian to corporate personalities like Elon Musk or Ryan Cohen to ordinary investors who develop followings on YouTube, TikTok, and other social media platforms. For example, Elon Musk tweeted ‘GameStonk!!’ on January 26, 2021. In response, GameStop’s stock price soared around 40%. On July 19, 2021, Ryan Cohen tweeted a picture of himself holding chopsticks up his nostrils. Followers speculated that the chopsticks signaled an impending GameStop stock split (Cohen is the chair of GameStop’s board). Kevin Paffrath, a YouTube finfluencer known as MeetKevin, has launched an exchange-traded fund called the The Meet Kevin Pricing Power ETF. And, in December 2022, the SEC charged eight social media influencers with fraud and stock market manipulation on Twitter and Discord.
While pump-and-dump schemes are clearly illegal, the other examples—and much finfluencing activity—do not involve any obvious illegality. No false information or even any new information is disseminated; nevertheless, stock prices react as though there is new information. This raises the possibility that finfluencers encourage investor response to non-information or stale information. It also calls into question the impact finfluencers have on investing preferences and price discovery, including the meaning of ‘information’ for investors.
This frames the Article’s central insight: finfluencers are expanding the types of ‘information’ reflected in stock prices. Markets must reconsider what information is contained in stock prices and who controls or shapes that information.
The Article begins by providing a descriptive account of the phenomenon of finfluencing. By detailing the roles of various kinds of finfluencers in the stock market, the Article develops a taxonomy of finfluencers—celebrity, identity, and ordinary—that can be used to assess their impact. While finfluencers are not new to the stock market, their greatly expanded reach, driven by social media, is a recent phenomenon. Social media has also provided a low cost, easy mechanism for ordinary retail investors to become powerful finfluencers.
The Article then provides an analysis of how finfluencers complicate the traditional understanding of stock market price discovery. The conventional understanding of price discovery focuses on the exchange of ‘information,’ typically tied to the present value of an issuer’s future cash flows, between traders. Finfluencers, however, are motivated by a much broader set of incentives than simply seeking out fundamental value information. They seek to maximize popularity, be entertaining, and ‘grow their brand,’ among other motivations. Because they also increasingly mediate the information that reaches retail investors and provide powerful coordination mechanisms that allow their (and their followers’) trading activity to affect stock price movements, they are shifting the types of ‘information’ stock price movements reflect.
For example, if finfluencers and their followers trade for nonpecuniary reasons or select stocks based on factors not directly related to future cash flows, such as an issuer’s sustainability or cultural values, a stock’s price may grow to reflect those characteristics. Even though traditional theory might not deem this to be ‘information,’ it could be understood as information about the value of a company in a broader sense. Consider a finfluencer-driven ‘inflated’ price that reflects the fact that a significant portion of investors prefer companies with climate-focused missions. The higher price might allow the company to raise capital more cheaply and fund more projects that eventually become profitable, bringing its ‘underlying’ value closer to its higher stock price. As a result, the higher stock price no longer looks inflated; it looks informative of the company’s future cash flows—and is therefore more ‘accurate.’
Finfluencer-driven trading is positioned to have long-lasting effects. This is because finfluencers magnify the social media-fueled impact of retail trades. It is also because other market participants may increasingly rationally participate in finfluencer-driven trading or shift financial decisions in response to or in anticipation of finfluencer-driven activity. The stock market’s basic function is a simple one: to facilitate capital raising. While noise is an inevitable component of markets, accurate prices are generally understood to facilitate smoother capital raising so that companies generating the greatest social value receive more capital at lower cost. On the one hand, finfluencers can distort prices, negatively affecting corporate governance, capital raises, securities litigation, and market confidence. On the other hand, more positively, finfluencers may cause capital to flow more to projects that simply reflect nontraditional types of information or values. This may be through selection of corporate projects or corporate partnerships with finfluencers, investment flow to finfluencer-driven products such as ETFs, or rational participation in finfluencer-driven trading.
The way forward should focus on leveraging finfluencer platforms for good. The more finfluencers mediate information, the more they cultivate their followers’ trust and are able to add value for their followers. However, finfluencers also become better positioned to gain from wrongdoing, manipulation, and the ability to predict and influence their followers’ behavior. While the securities laws are equipped to punish clearly illegal behavior, other reforms should focus on improving communication and information. Importantly, finfluencers can improve financial literacy and increase retail investor participation and market access. For example, the finfluencer Mrs Dow Jones has founded FINANCE IS COOL UNIVERSITY, an educational platform for financial literacy. Because so many retail investors turn to social media to learn about the stock market, improving the quality of their engagement will only become more important.
Sue S Guan is the Albert J Ruffo Assistant Professor of Law at Santa Clara University.