Can social media help firms improve communication with investors? In a recent paper, I argue that social media communication can give a firm an advantage over competitors in attracting attention to earnings announcements and lead to stronger price reaction to news announcements. This is because investors have limited resources for acquiring and processing to information, and social media makes it easy for them—and particularly retail investors—to learn about company results.
To test the hypothesis, I look at FTSE100 companies that are active users of social media. For example, 64 percent of FTSE 100 companies used Twitter to communicate with investors around earnings announcements over the period January 2015–April 2018. I find a reaction in share prices that is greater for of firms that post earnings results on social media than for firms that do not, regardless of the results. The reaction is stronger for firms with higher retail ownership, and I attribute this to investors perceiving social media communication as a sign that a firm is committed to transparency. Consistently, retail ownership increases in firms that communicate earnings results through social media. Firms can credibly build reputation for transparency and openness, because social media communication is costly in terms of time necessary to prepare and manage the message, and unfavorable user comments can expose the company to unwanted media or regulatory investigation.
I also find that, if firms post earnings news on Twitter, investors react more strongly to the news content, a result that suggests Twitter posts help investors process earnings news more efficiently. YouTube videos and Instagram pictures have either negative or no effect on investors’ ability to interpret earnings news, which suggests not all social media platforms help investors interpret complex financial information revealed at earnings announcements.
Firms can boost the impact of social media communication by increasing the frequency of social media messages. Consistently, a higher number of Twitter and YouTube posts leads to more positive price reactions, regardless of the news content. Higher user engagement with a tweet or an Instagram message, through reposts, comments, or likes, has a similarly positive effect on prices. These results highlight the importance of managing the message on social media.
A logical question is whether companies using social media to communicate corporate news are considered better investments. I document that analysts are more likely to upgrade a firm that communicates earnings results on Twitter in a 30-day period after earnings announcements. This result suggests that analysts perceive Twitter disclosures as an important indicator of which stocks to invest in.
This post comes to us from Pawel Bilinski, the director of the Centre for Financial Analysis and Reporting Research and course director of the MSc in corporate finance at Cass Business School, City, University of London. It is based on his recent article, “The Battle of Social Media Platforms: The Use of Twitter, Youtube and Instagram in Corporate Communication,” available here.