Technology and Crowdsourced Information: Implications for Capital Markets and Regulatory Enforcement

Abstract

The digital age has fundamentally reshaped capital markets and regulatory frameworks, fueled by the rise of powerful technologies and the democratizing force of crowdsourcing information. This dissertation explores these transformations, examining their impact on investor behavior and performance and the effectiveness of regulatory enforcement policies. In the first chapter, a joint work with Liran Eliner, I delve into the double-edged sword of crowdsourced information in retail investing. Online platforms and social media communities like Reddit's WallStreetBets have democratized access to investment opportunities and information sharing for retail investors. At the same time, user-friendly trading platforms with fractional and zero-commission trading empower them to participate in the market with unprecedented ease. In the first chapter, by combining datasets on retail investors' trading history and stock-specific social media activity, we provide evidence that social media induces retail trading more than other known attention-grabbing factors and is detrimental to investor performance. Specifically, we find retail investors underperform at transaction and portfolio levels from trades placed on days when a stock has abnormally high discussions on Reddit's WallStreetBets forum. We attribute the underperformance to market timing and the disposition effect. These findings are crucial in the context of heightened discourse on the impact of social media on financial markets. In the second chapter, I analyze a unique dataset from a developing country to assess two policies aimed at reducing unreported business income. The first policy mandated adopting and using electronic fiscal devices (EFDs), providing real-time sales data to regulators. This significantly improved revenue reporting, with a particularly strong effect on firms facing stricter enforcement. The second policy offered financial rewards to citizens who monitored compliance using a mobile app. This program further increased reported revenue, especially among firms with less prior enforcement scrutiny. Together, these studies suggest that technology and citizen participation can be powerful tools for regulators in resource-constrained environments, helping to bridge enforcement gaps and improve overall reporting compliance. In conclusion, this dissertation explores the multifaceted effects of digital transformation and crowdsourcing on capital markets and regulatory frameworks. While online platforms empower retail investors, my research sheds light on how relying solely on social media information can potentially hinder their investment performance. Conversely, the dissertation also demonstrates the transformative potential of crowdsourcing for regulatory enforcement, as demonstrated by the effectiveness of EFDs and citizen monitoring programs, fostering more transparent and accountable environments, particularly in developing economies.