Where Has the Foreign Signal Gone?

Abstract

We compare the relation between sentiment noise in the Twitter feed and losses for stocks of domestic and foreign firms. The mean quarterly domestic-foreign difference in the slope of next-quarter losses on measured noise is -1.40 (Newey-West t = -2.99). This slope is negative for 78 and 48 percent of the quarters for domestic and foreign stocks, respectively (block-bootstrap p = 0.016). Thus, this relationship is temporally more stable for domestic stocks. We use a noisy rational expectations model to explain these patterns through the composition of the contributor pool. The feeds for stocks of foreign firms have higher repeat-author concentration and a larger model-implied nonfundamental component than those for domestic firms. We interpret these differences through the producer-knowledge mismatch hypothesis. For foreign firms, the English-language contributor pool underrepresents the home-market investors who tend to possess informational advantages about them. Thus, the foreign signal is not gone but diluted.