The Costs of Silence: The Impact of Misinformation Regulation on Finfluencers and Corporate Information Environment

Using the unique context of social media censorship in China, we investigate how misinformation regulation on investor-focused social media platforms influences the behavior of platform influencers (i.e., finfluencers) and its subsequent effects on capital markets. Our findings reveal that misinformation regulation significantly increases account deletions among finfluencers, particularly those exhibiting a more negative tone prior to the regulation. Additionally, remaining finfluencers respond strategically by posting fewer messages and adopting a more positive tone in their content. Despite these behavioral adjustments, the regulation proves ineffective in enhancing the corporate information environment. This is evidenced by a decline in price informativeness, as reflected in weaker correlations between current stock prices and future earnings news, alongside heightened short-term market reactions to earnings announcements. Furthermore, we provide indirect evidence of potential regulatory capture amidst misinformation regulation. Overall, our results underscore the need for caution when implementing regulatory interventions on investor-focused social media platforms.