Backing from macro finfluencers was associated with a first-day closing price almost 50 per cent higher than IPO offer price, researchers found.Eva-Katalin/Getty Images
A finfluencer was recently ordered to pay a penalty of $30,000 plus costs by an Alberta Securities Commission panel for failing to properly disclose that he was paid to publish social media posts that promoted certain small-cap Canadian stocks.
He acknowledged that his only formal education in investing or finance was an introduction-to-finance course at university and a handful of online do-it-yourself courses. Nonetheless, he had over 50,000 subscribers on YouTube.
Is this a one-off situation? Or a sign that the financial world around us has changed in ways we simply didn’t contemplate when our current capital markets framework was built?
The finfluencer’s class is in session. Is it worth paying for?
A recent paper in the Journal of Behavioral Finance, Digital Sentiment and the Retail Crowd: How Finfluencers Shape IPO Valuations, found that social media hype can have an impact on initial public offerings to a degree that can’t be ignored.
Looking at almost 400 IPOs in India over a decade, the researchers found that those endorsed by macro finfluencers, defined as financial content creators with more than 200,000 followers, actually showed higher initial returns after going public than normal.
Endorsements from macro finfluencers were associated with a first-day closing price almost 50 per cent higher than the IPO offer price. Additionally, the 180-day post-IPO return was 35 per cent on average.
In contrast, the mean performance for all IPOs in the period studied showed a first-day closing price only 30.74 per cent higher than the offering price and a 180-day post-IPO return of only 16 per cent.
The research also found that while participation in these IPOs surged for retail investors, institutional investors’ behaviour was statistically unchanged.
The authors suggest that financial content creator hype has become an informal but powerful part of the modern-day version of the new-listing roadshow. Traditionally, a “roadshow” is the marketing campaign that investment bankers and company executives engage in before an initial public offering to explain why a company’s soon-to-be publicly listed stock is worth buying.
In the past, this was mostly done in hotel conference rooms. Over the years, these roadshows have slowly shifted online. The latest evolution apparently includes courting non-professional social media content creators and the data suggests this ultimately affects retail investors who are more likely to eschew traditional sources of investment advice.
Opinion: As more investors turn to ‘finfluencers’ for help, advisors need to step up
A CFA institute study from 2023 revealed that about 48 per cent of Gen Z and 42 per cent of millennials turn to social media for investment information. Social media is a world where credibility is measured in likes, view counts, and subscribers. This is not necessarily correlated with objectively sound advice.
Last year, the Canadian Bar Association published a paper which argued that traditional securities rules were written for professionals with licences, not content creators with ring lights.
It also highlighted a number of challenges in tackling this new reality. Content creators can operate globally. They can also operate anonymously.
And surely there will be a debate between what can cause more harm to consumers: licensed advice providers subject to sales quotas versus unlicensed content creators, some of whom are providing excellent food for thought about navigating the financial product landscape.
It is worth pointing out that not all finfluencers are the same. Some use their platforms to improve financial literacy, show people how to budget with hands-on exercises, and have helped bring the message about the impact of the costs of investments and advice to the forefront.
Muddying the waters further are the non-financial content creators who occasionally partner with financial companies. These can often be celebrities with follower counts in the tens of millions who are paid for exposing their audiences to financial brands they may not truly understand.
The textbook case study for this would be Tom Brady, Larry David, and the other celebrities who promoted the FTX cryptocurrency exchange platform which would soon after go bankrupt. Former FTX CEO Sam Bankman-Fried was sentenced to 25 years in prison for stealing US$8-billion of customers’ money.
Finfluencers are not going away. For better or worse they are now a part of modern capital markets. While we figure out if and how to adapt the rules to this new reality, investors should add another skill under the umbrella of financial literacy: information literacy.
Preet Banerjee is a consultant to the wealth management industry with a focus on commercial applications of behavioural finance research.