How a Company’s Tweets Impact Its Stock Prices — Temporarily and Permanently

New research from Maryland Smith’s P.K. Kannan shows how a firm’s social media posts have big impacts on its stock price, both temporarily and permanently.

For the paper in the Journal of Marketing, Kannan, associate dean for strategic initiatives and Dean’s Chair in Marketing Science, worked with Ewelina Lacka and Gbenga Ibikunle of the University of Edinburgh and D. Eric Boyd of the University of Central Florida. They focused on Twitter, combing through tweets from a sample of S&P 500 IT firms and ultra-high frequency trading data to see how a firm’s tweets impacted its stock price in real-time.

The researchers honed in on Twitter because of the “always-on” nature of the social media platform. They point to data that 92% of firms use their Twitter accounts more than once a day, with 42% of those tweeting up to five times a day, and 19% tweeting six to 10 times a day.

Their findings have big implications for firms’ social media marketing teams.

The researchers looked at the content firms were posting on Twitter to see what types of tweets had the biggest impact on stock prices. They find that two things matter in tweet content: sentiment and subject matter.

They show that tweets with positive or negative sentiment were consistently linked with a reduction in permanent price impact and an increase in temporary price impact, as measured by the variance in stock price.

It’s good for firms when tweets create permanent price impact, but temporary price impact is undesirable – and potentially negative – say the researchers. That’s because temporary jumps and dips in stock prices can signal uncertainty about a firm, which can increase transaction costs for investors and can lead to increases in the cost of capital for the firms themselves.

They found similar results for tweets that only reflected a consumer or competitor orientation, but the impacts were smaller.

“Our results show the importance of interaction effects between tweet valence and subject matter in generating permanent price impact,” write the researchers. “The average negative and positive valence tweet when viewed through the lens of consumer or competitor orientation generates a permanent price impact, while a competitor-oriented tweet with a negative valence is likely to have the highest permanent price impact.”

This is a crucial finding for marketers, say the researchers. It should upend the way companies plan their social media posts throughout the day because “valence as a singular attribute is associated with decreasing permanent price impact,” they write.

Investors in financial marketers are paying attention to firm-generated social media content and their ability to act on information at sub-second levels allows for instantaneous incorporation of social media content.

Algorithmic traders, or “algos,” can scour a myriad of sources, including social media content, for information and act on it in milliseconds.

That’s something marketing managers need to keep in mind when planning social media posts and campaigns, say the researchers.

“When social media posts contain what could be referred to as ‘partial information’ – only valence or subject matter – they lack the context that allows investors to make inferences about firm value. However, when, for example, tweet valence is set in the context of a specific subject (e.g., customer or competitor), it, on average, offers valid information that can be acted on by investors.”

They write: “Our study shows that by carefully incorporating attributes, such as valence and subject matter, marketing managers can design social media content to generate varying degrees of permanent or temporary impact.”

Firms should make sure their tweets include both valence and subject matter if their aim is to improve the informativeness of their stocks with respect to firm value, say the researchers. By using permanent price impact as a metric to evaluate the long-term impact of tweets, social media managers can design campaigns that have an enduring impact on stock price, which should be a desirable outcome for firms.

But not all tweets are strategic for long-term price impact. 

“Some tweets are aimed at the creation of social media ‘buzz,’ which is similar to the temporary price impacts we examine in this study,” write the researchers. “Firms can achieve social media ‘buzz’ by disseminating tweets as we show that tweets, in general, mostly generate temporary price impacts. We urge caution, however, because temporary price impacts are linked to larger transaction cost for investors and cost of capital for firms.”

Read the research, “Measuring the Real-Time Stock Market Impact of Firm-Generated Content,” in the Journal of Marketing.