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Jun 01, 2020

IR papers: How social media influences investors

A roundup of academic research from the world of IR studies

The social media sentiment effect
More and more institutional investors track social media for insights into investor and consumer sentiment, and a new study sheds light on how they use that data. Examining changes in customer-expressed emotional content for 38 corporate brands, researchers find that investors’ stockholding reactions differ according to their investing style. Dedicated investors and quasi-indexers boost their holdings when faced with positive sentiment – but show no reaction to negative ‘word of mouth’.

By contrast, transient investors (with high portfolio turnover and short investment horizons) are unaffected by positive social media but will cut stockholdings in response to negative opinion.

The researchers say competitive and intangible asset intensity influences these results. ‘When deciding how to react to social media posts, corporate managers should consider the composition of their institutional investors, the type of assets in their balance sheets and the nature of the competition,’ concludes study co-author Hang Nguyen, assistant professor of marketing at Michigan State University.

More meetings and longer answers linked to cheaper financings
There is strong support for the general notion that greater corporate transparency leads to a lower cost of capital. Now comes new research showing how specific investor relations initiatives at the time of capital-raising can affect this relationship – both positively and negatively.

Sampling almost 20 years’ worth of new equity and debt issues by 1,190 US companies, Canadian investigators hand-collected data on the frequency of press releases and interactive forums (such as conference calls, investment meetings, and so on) leading up to the financings. They further drilled down to uncover the ratio of Q&A to the overall duration of events and the average answer length for each question.

Findings show that issuing more press releases and conducting meetings featuring longer Q&A segments are positively associated with the cost of financing. ‘On the other hand, less visible firms raising equity tend to experience less expensive financings when they organize more frequent meetings and offer longer answers to analyst and investor questions,’ says study co-author Sam Kolahgar, assistant professor of finance at the University of Prince Edward Island.

Kolahgar suggests the first two associations are likely a consequence of greater ambiguity and uncertainty, attributing the latter to firms’ efforts to mitigate information asymmetry. ‘Communications with an interactive dynamic are what’s most important,’ he says. ‘They lead to greater certainty and suggest management teams are confident in their business plan.’

Cams are light on investor insights
Preparing for critical audit matter (Cam) disclosures was a top focus for many firms last year. But a new study from the University of Texas at Dallas by Dr Rebecca Files and PhD candidate Pinar Gencer shows the first wave of Cams has left little impression on investors.

Their survey of large accelerated filers finds negligible price or trading volume response around 2019 Cam release dates. The researchers say many of the sampled firms already provided similar information in earlier years’ 10K risk disclosures. ‘Even Cams with novel information provoked no significant investor reaction,’ says Gencer, who notes the information quality of Cams for smaller firms remains to be seen.

World o’ research
M&As announced the same day as the release of key macroeconomic indicators realize higher announcement-period returns than those made public on non-indicator days. Researchers say the effect reflects higher market attention and is particularly relevant for smaller deals.

This article appeared in the Summer 2020 issue of IR Magazine