Wisdom of crowds or awkward squad? Social interaction and the information efficiency of the Chinese capital market

Existing studies on the impact of social media on the information efficiency of capital markets have opposing views. One often-overlooked aspect in these studies is the role of investor interaction, a core feature of social media. To address this gap, we employ social network analysis (SNA) to investigate how investor interactions on Eastmoney, China's largest online stock forum, influence capital market efficiency. Our findings indicate that online investor communication can effectively disseminate firm-specific information through social networks when investor interactions are at a moderate level. However, beyond a certain threshold, heightened interactions contribute to market noise, thereby distorting the stock price discovery process. Our mechanistic analysis reveals that increased investor interactions stimulate irrational emotions at both market and stock levels, ultimately impairing capital market efficiency. This study contributes to social network analysis and behavioral finance by illuminating the impact of online social interactions among retail investors on capital market information efficiency.