Can Social Media Promote Price Discovery?

Liquidity providing and price discovery are two basic functions of financial market. Can social media gather information effectively and promote price discovery? Based on rational expectation equilibrium model, this paper investigates the effect of social media on promoting price discovery by considering social media spreading information about stock fundamental value, and explores the impact of information quality on market efficiency, market liquidity and capital cost. The study draws a conclusion that media information transmission can promote price discovery. It is documented that the correlation of media information and fundamental value is positively related to market efficiency and negatively related to capital cost. However, rumor propagation has an impeditive effect on price discovery. We show that traders' herd behavior decreases price informativeness, and the greater the variance of rumors, the lower of market efficiency and the higher of capital cost.