New York University, Northwestern University, London Business School
| June 22, 2015
The authors provide early large-sample evidence on the use of social media for financial communications by S&P 1500 firms.
Firms that receive less traditional media coverage are more likely to use social media in general and for earnings news, although the decision to disseminate earnings news is biased towards good news.
Disseminating financial information through social media improves the firm's information environment, but this beneficial effect is based on the level of control the firm has over its social media content.
The authors' findings are relevant for firms considering the
corporate use of social media
and to policy debates concerning emerging disclosure technologies.
Corporate Use of Social Media white paper guideline
Social media has transformed communications in many sectors of the U.S. economy. It is now used for disaster preparation and emergency response (FEMA, 2013), security at major events (PERF, 2011), and public agencies are researching new uses in geolocation (DARPA, 2010), law enforcement, court decisions, and military intelligence (DARPA, 2011). Internationally, social media is credited for organizing political protests across the Middle East Stone and Cohen, 2009) and a revolution in Egypt (WSJ, 2011; Vargas, 2012; Acemoglu, Hassan and Tahoun, 2015).
In the business world, social media is considered a revolutionary sales and marketing platform (Forbes, 2013; HBR, 2010; Larcker et al., 2012) and a powerful recruiting and networking channel (Li, 2013). Little research exists, however, on how firms use social media to communicate financial information to investors, despite firms devoting considerable effort to creating and managing social media presences directed at investors.
Motivated by this lack of research, we provide early large-sample evidence on the corporate use of social media for investor communications. The specific hypotheses that we examine are based, in part, on practitioner surveys regarding social media usage (e.g., HBR, 2010). This approach ensures that our research agenda is relevant to firms who use or are considering the use of social media to communicate with investors.
These surveys suggest that a perceived benefit of corporate social media usage is the opportunity to improve investor communications and investor relations. In addition, we hypothesize that a potential cost or negative consequence of social media usage for investor communications is that firms do not retain full control over who receives their financial communications. This consequence arises from the viral nature of social media, which allows investors to broadly disseminate information about the firm without the firm’s direct involvement.
As a result, it is possible that investor communications via social media can spread to uninformed individuals in a way that creates adverse consequences for the firm. In light of these potential benefits and concerns, we examine the determinants and consequences of social media adoption in the context of this investor communications view.
More specifically, we investigate why firms choose to disseminate investor communications through social media, whether investors and traditional media outlets respond to social media disclosures, and whether potential adverse consequences to the firm exist from the use of social media to disseminate investor communications.
Our analysis focuses on earnings announcements through Twitter for four reasons. First, our comprehensive data on social media usage for all firms in the S&P 1500 from 2010 through the first quarter of 2013 reveal that Twitter is the preferred social media platform for investor communications and that earnings announcements are the most commonly “tweeted” item.
Second, the extant literature generally finds that earnings announcements are of first-order importance in disclosure policies directed at investors.
Third, Twitter provides a clean research setting to examine the effect of social media disclosures because we can identify the precise time that the information was disseminated.
Fourth, we can control for the information content of earnings announcements more effectively than the information content of other financial disclosures, such as those related to board turnover, executive turnover, new customers or new products.
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