New research from a group of global academics highlights that public firms that receive less traditional media coverage are more likely to use social media generally and specifically to report earnings news, however, the decision to use social media to publicize earnings news is biased towards good news over bad news. The study also determined that “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.”
Authors Michael J. Jung, James P. Naughton, Ahmed Tahoun and Clare Wang argue that the last few years have clearly been the turning point for the use of social media in a business context, and that business are using and will continue to use this valuable new tool in their public relations toolboxes.
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Jung et al. highlight that it is “quite possible that investor communications via social media can spread to uninformed individuals in a way that creates adverse consequences for the firm.” That’s why they chose to look at the determinants and consequences of social media adoption in the context of investor communications. The goal of their study was to examine why firms choose to disseminate investor communications through social media, whether investors and media outlets responded to social media disclosures, and whether potential negative consequences could result from use of social media to disseminate investor communications.
Focusing on earnings announcements via Twitter for S&P 1500 firms
The team decided to focus on earnings announcements via Twitter because data on social media usage for all firms in the S&P 1500 from 2010 through the first quarter of 2013 showed that Twitter is the most common social media platform for investor communications, and that earnings announcements are the most frequently “tweeted” item. The researchers also noted that Twitter offers a “clean research setting to examine the effect of social media disclosures because we can identify the precise time that the information was disseminated.”
Finally, Twitter also offers the advantage that it can convey the information content of earnings announcements better than the information content of other financial disclosures related to board turnover, executive turnover, new customers or new products. That means it’s possible to isolate the effect of social media more effectively with earnings announcements compared to other types of disclosures.
The results of the study show that companies who tweet earnings also issue more press releases. The authors point out that this is consistent with the idea that these firms are attempting to publicize their activities. On the other hand, companies who tweet earnings usually have less traditional media coverage, consistent with the view that social media can compensate for a (perceived) lack of traditional media attention.
Larger firms are more likely to use Twitter to disseminate earnings news, which goes against the idea that smaller firms benefit more from the use of social media. The study shows that companies are “opportunistic in their use of Twitter as firms are less likely to disseminate earnings news through Twitter when the earnings miss the consensus forecast. This result is consistent with prior literature showing that firms use voluntary disclosure (e.g., conference calls) to portray themselves in a positive light (e.g., Mayew, 2008; Larcker and Zakolyukina, 2012).”
Last but not least, it turns out there is a “reduction in spreads when the firm tweets earnings news and more followers receive the earnings announcement tweet. This reduction in information asymmetry is consistent with the small sample evidence on Twitter usage among technology firms in Blankespoor, Miller, and White (2013).” The study data on the other hand, suggest that information asymmetry increases as greater numbers of the company’s followers retweet the earnings info to an audience that has little knowledge of the firm (that is, the followers’ followers and so on).
The study data also suggest that there “are adverse consequences to the firm’s information environment through an increase in information asymmetry when its earnings announcement tweets are retweeted to individuals who do not follow the firm.”
See full study below.