The customer knows best: The investment value of consumer opinions

Research output: Contribution to journalArticle

Abstract

This paper investigates whether consumer opinions convey value-relevant information to financial markets. Using a data set of more than 14.5 million customer product reviews on Amazon.com from 2004 through 2015, I find evidence that consumer opinions contain information for stock pricing. A spread portfolio that is long on stocks with high abnormal customer ratings and short on stocks with low abnormal customer ratings delivers an abnormal return of around 55.7 to 73.0 basis points per month. There is no evidence of return reversals in the subsequent year. The return predictability of customer ratings continues to hold after controlling for firm characteristics such as gross profitability, advertising, research and development expenses, and trading volume. Furthermore, abnormal customer ratings positively predict revenues and earnings surprises. These results suggest that consumer opinions contain novel information about firms’ fundamentals and stock pricing.

Original languageEnglish (US)
Pages (from-to)164-182
Number of pages19
JournalJournal of Financial Economics
Volume128
Issue number1
DOIs
StatePublished - Apr 2018

Fingerprint

Rating
Pricing
Earnings surprises
Abnormal returns
Return reversal
Trading volume
Profitability
Firm characteristics
Amazon
Return predictability
Revenue
Financial markets
Product review
Expenses

Keywords

  • Cash flow surprises
  • Consumer opinions
  • Serendipitous information
  • Stock pricing
  • Wisdom of crowds

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

Cite this

The customer knows best : The investment value of consumer opinions. / Huang, Jiekun.

In: Journal of Financial Economics, Vol. 128, No. 1, 04.2018, p. 164-182.

Research output: Contribution to journalArticle

@article{affca2b78bcc4b309abab98af22d6a78,
title = "The customer knows best: The investment value of consumer opinions",
abstract = "This paper investigates whether consumer opinions convey value-relevant information to financial markets. Using a data set of more than 14.5 million customer product reviews on Amazon.com from 2004 through 2015, I find evidence that consumer opinions contain information for stock pricing. A spread portfolio that is long on stocks with high abnormal customer ratings and short on stocks with low abnormal customer ratings delivers an abnormal return of around 55.7 to 73.0 basis points per month. There is no evidence of return reversals in the subsequent year. The return predictability of customer ratings continues to hold after controlling for firm characteristics such as gross profitability, advertising, research and development expenses, and trading volume. Furthermore, abnormal customer ratings positively predict revenues and earnings surprises. These results suggest that consumer opinions contain novel information about firms’ fundamentals and stock pricing.",
keywords = "Cash flow surprises, Consumer opinions, Serendipitous information, Stock pricing, Wisdom of crowds",
author = "Jiekun Huang",
year = "2018",
month = "4",
doi = "10.1016/j.jfineco.2018.02.001",
language = "English (US)",
volume = "128",
pages = "164--182",
journal = "Journal of Financial Economics",
issn = "0304-405X",
publisher = "Elsevier",
number = "1",

}

TY - JOUR

T1 - The customer knows best

T2 - The investment value of consumer opinions

AU - Huang, Jiekun

PY - 2018/4

Y1 - 2018/4

N2 - This paper investigates whether consumer opinions convey value-relevant information to financial markets. Using a data set of more than 14.5 million customer product reviews on Amazon.com from 2004 through 2015, I find evidence that consumer opinions contain information for stock pricing. A spread portfolio that is long on stocks with high abnormal customer ratings and short on stocks with low abnormal customer ratings delivers an abnormal return of around 55.7 to 73.0 basis points per month. There is no evidence of return reversals in the subsequent year. The return predictability of customer ratings continues to hold after controlling for firm characteristics such as gross profitability, advertising, research and development expenses, and trading volume. Furthermore, abnormal customer ratings positively predict revenues and earnings surprises. These results suggest that consumer opinions contain novel information about firms’ fundamentals and stock pricing.

AB - This paper investigates whether consumer opinions convey value-relevant information to financial markets. Using a data set of more than 14.5 million customer product reviews on Amazon.com from 2004 through 2015, I find evidence that consumer opinions contain information for stock pricing. A spread portfolio that is long on stocks with high abnormal customer ratings and short on stocks with low abnormal customer ratings delivers an abnormal return of around 55.7 to 73.0 basis points per month. There is no evidence of return reversals in the subsequent year. The return predictability of customer ratings continues to hold after controlling for firm characteristics such as gross profitability, advertising, research and development expenses, and trading volume. Furthermore, abnormal customer ratings positively predict revenues and earnings surprises. These results suggest that consumer opinions contain novel information about firms’ fundamentals and stock pricing.

KW - Cash flow surprises

KW - Consumer opinions

KW - Serendipitous information

KW - Stock pricing

KW - Wisdom of crowds

UR - http://www.scopus.com/inward/record.url?scp=85042382663&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=85042382663&partnerID=8YFLogxK

U2 - 10.1016/j.jfineco.2018.02.001

DO - 10.1016/j.jfineco.2018.02.001

M3 - Article

AN - SCOPUS:85042382663

VL - 128

SP - 164

EP - 182

JO - Journal of Financial Economics

JF - Journal of Financial Economics

SN - 0304-405X

IS - 1

ER -