In April 2017, the U.S. Securities and Exchange Commission charged 27 firms and individuals after discovering that companies were paying writers to promote stocks on investing websites like Seeking Alpha.
According to the SEC, executives at companies including Galena Biopharma had commissioned the publication of dozens of bullish equity research articles about their own stocks. In the example of Galena, the company got a $200,000 fine, while former CEO Mark Ahn had to pay over $1.3 million in penalties and disgorgement.
But even before the SEC started investigating stock promotion on Seeking Alpha and elsewhere, research suggests that investors were already wary of anonymously published equity research.
Academic researchers at Cornell University studied how investors reacted to stock research published anonymously on Seeking Alpha between January 2006 and October 2018. Authors Travis Dyer and Eunjee Kim defined anonymity by how easily Seeking Alpha readers could attribute an author to source based on the information in that author’s biographical profile.
They found that the percentage of anonymous authors increased dramatically over the past decade, nearly doubling from 28 percent in 2009 to 51 percent in 2018. Over the same time period, the proportion of articles written by anonymous authors rose from 8 percent to 33 percent.
The stock price reaction to these anonymously written articles, however, was “muted,” according to Dyer and Kim.
“Anonymous equity research generates lower stock price reactions that are approximately 15 basis points lower than non-anonymous research,” they wrote. “This result is consistent with the idea that market participants are concerned about the credibility of messages provided by anonymous sources and thus rely less on such information.”
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The Cornell researchers then sought to determine whether and to what extent firm insiders published or paid stock promoters to publish equity research anonymously on Seeking Alpha, as the SEC had alleged that Galena Biopharma did.
They did this by examining whether there were “significantly more” anonymous articles written about a firm before managers at that firm traded their company stock. They observed patterns that suggested that “firms insiders are likely among those contributing anonymously to crowdsourced investment platforms.”
Seeking Alpha, for its part, has taken steps to improve verification and monitoring of its anonymous content writers, starting in 2014, when a Seeking Alpha author uncovered some of the same paid stock promotion activity that would later feature in the SEC’s investigation. The company did not respond to a request for comment in time for publication.
According to the Cornell researchers, this enhanced oversight of Seeking Alpha writers has mitigated the market’s discounting of anonymously published research.
“Investors discount anonymous equity research in part because of credibility concerns,” the authors concluded. “Investors’ reliance on anonymous equity research increased after the regulatory oversight and platform monitoring of author integrity was enhanced.”
