Companies often avoid disclosing bad news through social media, but a new study reveals that posting modestly disappointing earnings results on Twitter can actually dampen a negative price reaction. The effect is strongest for firms with the highest retail ownership.
‘Posts on Twitter increase the price reaction to earnings news,’ explains study author Dr Pawel Bilinski, associate professor in accounting at the University of London. ‘[Tweets] also boost positive earnings news.’
Combing through more than three years of FTSE 100 company earnings announcements on social media, Bilinski finds that, on average, a one standard deviation increase in an earnings surprise communicated on Twitter leads to a 12.5 percent stronger price reaction.
For firms with many retail holders, just being present on social media increases price reaction to results announcements, with an average gain of 4.1 percent – irrespective of the news content. That’s important because, on average, retail investors tend to react less favorably to earnings announcements than institutional investors, no matter what the news content. Bilinski, whose research is covered in this year’s FTI Consulting Social Divide in the City report, says retail investors see social media as a signal of higher transparency.
‘Consistently, we find retail investors buy more stock in companies that convey earnings news on social media and analysts upgrade recommendations for these stocks,’ Bilinski reports, adding that firms can dramatically amplify the impact of their social media posts during the results period simply by posting more.
But Bilinski’s research also uncovers a major caveat: not all social media channels are equal – YouTube videos and Instagram pictures had either no effect or a negative effect on investors’ ability to interpret earnings news.
‘IROs must carefully choose the right social media platforms to communicate with investors,’ concludes Bilinski, noting that about a third of FTSE 100 firms have yet to communicate earnings results on Twitter.
You hear a lot of it these days
Talk is cheap. And cheap talk can be expensive. In a paper titled ‘How to talk down your stock returns’, German researchers show that the market punishes managers who blather during earnings conference calls. Using textual analysis and a novel metric for management blathering – defined as a lack of factual content when answering investors’ questions – the investigators say companies where managers extrude the purest drivel experience significantly lower cumulative abnormal returns following earnings calls.
‘Our results correspond to the obfuscation hypothesis,’ says study co-author Fabian Woebbeking, a PhD candidate at Goethe University Frankfurt. ‘The more blathering, the more perceived the noise of a message and, in turn, uncertainty among investors.’
The research team also says blathering is particularly pronounced when earnings just miss analysts’ expectations. ‘That suggests blathering might be used to obfuscate earnings management,’ says Woebbeking.
Background noise?
It’s long been presumed that TV advertising, originally intended for consumers, has an effect on investors as well. Now we know for sure. A new study reveals that the average TV ad leads to a 3 percent rise in SEC Edgar queries and an 8 percent increase in Google searches for financial information within 15 minutes of its airing.
The effect is strongest during prime time for advertisers in the financial sector and for brands with names similar to their publicly traded parent company name.‘We were surprised at how direct and immediate the effect was,’ says study co-author Jura Liaukonyte, associate professor at Cornell University. ‘The ads are geared toward consumers but should also take into account how investors might react.’
The investigators find that for large advertisers, about 1 percent of daily trading volume can be directly attributed to product advertising.
This article originally appeared in the Summer 2019 issue of IR Magazine.
