Trading on Hearsay: When Does Cheap Talk Move Asset Prices?

Edward Halim, Yohanes E. Riyanto, Nilanjan Roy and Yan Wang

Abstract

We design an experiment featuring strategic information transmission from a privately informed investor capable of swaying followers’ investment decisions through a cheap-talk message. Confirming recent theoretical predictions, we find that a short investment horizon of influencers encourages credible information sharing among investors. Followers trade in the direction of the message from a short-term influencer but ignore a long-term influencer’s communication. Consequently, short-term influencers generate price impact through their messages, which increases with the transparency of the trading institution, while long-term influencers cannot affect the market price. The informational efficiency of asset prices is invariant to the influencer’s investment horizon.