[Sponsored Article] Autocratic regimes control traditional media and use optimistically biased news reports – including corporate news – to strengthen their political power. This is because they know negative news can destabilise the economy and weaken their position. In China, new forms of social media, such as online stock platforms which rely on the ‘wisdom of crowds’ for independent user-generated content, are now supplying market information. Can this form of social media correct the bias of traditional media by providing less positively biased corporate information to the market? Three accounting academics – Professor Zhang Tianyu at The Chinese University of Hong Kong (CUHK) Business School, Assistant Professor Eric Wang at The Chinese University of Hong Kong (Shenzhen), and Professor T.J. Wong at the University of Southern California – carried out research to find out the answer. Their study, entitled ‘Does Chinese social media correct the optimistic bias of traditional media?’ used a comprehensive sample of corporate news reports from traditional, state-controlled newspapers and the analyses and opinions of stocks and shares of investors on the online stock forum East Guba between 2009 and 2016. “The objective was to examine whether Chinese social media corrects the positive spin or bias often found in traditional media, economic and stock market reports by providing more neutral or accurate corporate information,” says Prof. Zhang. Prof. Zhang explains that China offers a great setting to study whether the wisdom of social media crowds can correct the optimistic bias of traditional media in an autocratic regime. “Although the equity market was established only in the early 1990s, it has grown to have more than 3,000 firms listed in its two domestic stock exchanges,” he says. “Newspaper coverage of these firms is vast, with more than 70 state-owned traditional newspapers spanning most of the provinces in the country,” he adds. Different Tones between Traditional and Social Media During the study period, about 146 million posts were left on East Guba – comprising 83,000 posts per trading day – covering more than 3,000 listed firms in China. The final study sample comprised more than 970,000 firm-day observations. There was at least one news article from traditional media and three postings from East Guba for each company on the same day. The academics used a machine learning method to work out the tone of each article and post. They then aggregated the tone of each type of media for each firm on each day to create a comparison. By comparing the tone of articles and posts about the same firms on the same day, they considered whether mainland social media plays a monitoring role by remaining less biased in its content when traditional media reports are likely to be more optimistically biased. “When the same events are covered by Chinese social media and traditional media, the corporate news reports in state-run media and in social media posts are unlikely to share the same degree of positivity, if the tone of traditional media reports is positive, rather than neutral or negative,” Prof. Zhang says. State-controlled traditional media is often more concerned about creating a crisis, and is aware that investors’ attention is more likely to be heightened when the stock market or businesses experience bad news rather than good news. By contrast, traditional media is likely to be more positively biased in its news reports when the tone is optimistic, and more restrained – and less likely to have distorted news – when the tone of its reports is neutral or negative. “We found that there is a positive correlation in the tone of the traditional state-run reports and social media posts about the same company on the same day,” Prof. Zhang says. The Monitoring Role of Social Media against Government Bias The study also examined whether social media actually supplies less biased information, which can serve as a benchmark for accurately illustrating traditional media’s optimistic bias. This is done by evaluating the stock return responses to the different tones of the two types of media. The researchers found that the positive correlation is significantly reduced when the tone of the newspapers is positive. “This finding is consistent with our conclusion that East Guba plays a monitoring role in correcting the bias of state-owned media. It also suggests that the tone of East Guba’s posts is less optimistic than that of the state-run newspaper reports, at times when traditional media organisations are more likely to print positively biased articles.” Further analyses showed that political factors, such as state ownership of the firms covered in reports and the political sensitivity of the periods when the articles were posted, also shaped East Guba’s monitoring role in correcting the bias shown by newspapers. The contributors to these online stock forums are individuals, not state employees. Therefore, their views were unlikely to be controlled or influenced by the state. “The business model of these online platforms relies on the ‘wisdom of crowds’ to provide valuable information to the community,” Prof. Zhang says. The academic added that it was easier for the regime to control editors working in traditional media and a small set of journalists under their direct control, rather than the crowd on social media. “As social media users post their opinions online, they are providing an independent interpretation of the news that serves as a check against the bias of the traditional media,” explains Prof. Zhang. Our results show that in China, social media’s reliance on the ‘wisdom of crowds’ can help to shelter itself from the mainland government’s direct intervention and provide corporate news that can serve as a check against the positive bias of traditional media. Prof. Zhang Tianyu The Impact of Censorship However, it was also possible that social media websites would be subject to censorship, meaning that the government could delete highly critical posts or force social media contributors to refrain from adding negative posts due to self-censorship. Prof. Zhang says this could be true especially during politically sensitive periods, such as when the Chinese government grew concerned about stability and banned shareholders with stakes of more than five percent from selling shares for the next six months, following the 2015 stock market crash. This saw Chinese share prices fall by nearly a third. Prof. Zhang explains that the study showed the general tone of traditional media was overwhelmingly positive – with 77.9 percent of reports positive, while posts on social media were largely negative, with only 13 percent of posts positive. “The tone difference confirms prior research that traditional media is likely to be positively biased, while social media is less positively biased,” says Prof. Zhang. Further analyses showed that the traditional media bias and the role of social media to regulate and correct traditional media bias were affected by political incentives. In the period after the government’s 2015 intervention, there was a more significant drop in the positive association of the tone between traditional and social media when the traditional media’s tone was positive. “This is consistent with our conclusion that the government has put more pressure on the state-controlled traditional media to remain optimistic, even after the market intervention. There is anecdotal evidence that the government pressured traditional media to be optimistic in its reporting during the stock market intervention,” he explains. The study also found that social media failed to play its monitoring role during the period around the National Congress meetings – the party congress held in Beijing every five years. During the party congress period, the number of social media posts drops significantly while the number of traditional media articles increases significantly. Prof. Zhang says this was consistent with earlier studies that found that Chinese companies suppressed the release of negative news in the years around the National Congress. Media Tone and Stock Returns The study also focused on whether media bias – as indicated by the deviation in the tones of the two types of media – could also be reflected in differences in stock return responses to the information that the media supplies. They found that when traditional media are more positively biased, as indicated by the divergence in tone between traditional and social media, the stock return response to the traditional media decreases significantly. “This suggests that the market could see through – at least partially – the bias and discount the information contained in the positive tone of the traditional media,” Prof. Zhang says. Yet, the researchers did not find any change in the stock return response to the tones of social media – when it deviates, either positively or negatively from that of traditional media. “This confirms our prior belief that social media is less biased – more neutral – and the market credulity does not change,” Prof. Zhang adds. The First Study on Social Media in an Autocratic Government The research has offered a number of interesting findings under an autocratic government. “This is the first study of whether, in an autocratic government, social media corrects the biased corporate news of traditional media by supplying less biased information to the market,” he says. “Our results show that in China, social media’s reliance on the ‘wisdom of crowds’ can help to shelter itself from the mainland government’s direct intervention and provide corporate news that can serve as a check against the positive bias of traditional media. “We have also provided new evidence that in China, the market can discount – at least partially – the positive bias of traditional media,” says Prof. Zhang. For more insights, please visit the website of China Business Knowledge @ CUHK . About the Researcher Zhang Tianyu is a Professor in the School of Accountancy at The Chinese University of Hong Kong. His research focuses on political institutions and governance in China’s emerging market. His recent research utlises the application of textual analysis in providing an understanding in China’s institutions. Prof. Zhang has published in top accounting, finance and economics journals. He has been named the second most prolific author by Abacus, with six papers on the Chinese capital market published in Tier 1 journals and a total of 2,493 citations during the 1999-2018 period. His research has been featured by overseas media. such as Wall Street Journal and Associated Press, and domestic media such as Caixin. Prof. Zhang is now sitting on the editorial board of The Accounting Review and Contemporary Accounting Research.