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To test the hypothesis, the author looks at FTSE100 companies who are active users of social media. For example, 64% of FTSE 100 companies used Twitter to communicate with investors around earnings announcements over the period January 2015–April 2018. He finds that firms that post earnings results on social media enjoy higher price reactions independently of the news content. This result is stronger for firms with higher retail ownership and the author attributes it to investors perceiving social media communication as a signal of firm’s commitment to transparency. Consistently, retail ownership increases in firms that communicate earnings results through social media. Firms can credibly build reputation for transparency and openness because social media communication is costly in terms of time necessary to prepare and manage the message, and unfavourable user comments can expose the company to unwanted media or regulatory investigation.

The author also finds that if firms post earnings news on Twitter, investors react more strongly to the news content, a result that suggests Twitter posts help investors process earnings news more efficiently. YouTube videos and Instagram pictures have either negative or no effect on investors’ ability to interpret earnings news, which suggests not all social media platforms help investors interpret complex financial information revealed at earnings announcements.

Firms can “boost” the impact of social media communication by increasing the frequency of social media messages. Consistently, a higher number of Twitter and YouTube posts leads to more positive price reactions unconditionally on the news content. Higher user engagement with a tweet or an Instagram message, through reposts, comments and likes, has a similar positive effect on price reactions. These results highlight the importance of managing the message on social media.

A natural question that arises given the results found in the study is whether companies using social media to communicate corporate news are considered better investments? The author documents that analysts are more likely to upgrade a firm that communicates earnings results on Twitter in a 30-day period after earnings announcements. This result suggests that analysts perceive Twitter disclosures as an important indicator for which stocks to invest in.

About the author

Pawel Bilinski is the Director of the Centre for Financial Analysis and Reporting Research and Course Director of the MSc in Corporate Finance at Bayes Business School, City, University of London.

More information on this research.

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McMeeking, K., Peasnell, K. and Pope, P. (2007), 'The Effect of Large Audit Mergers on Audit Pricing in the UK', Accounting and Business Research, 37 (4), pp. 301-319

Choi, Y., O'Hanlon, J. and Pope, P. (2006), 'Conservative Accounting and Linear Information Valuation Models', Contemporary Accounting Research, 23 (1), pp. 73-102

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Landsman, W., Peasnell, K., Pope, P. and Yeh, S. (2006), 'Which Approach to Accounting for Employee Stock Options Best Reflects Market Pricing?', Review of Accounting Studies, 11 (2/3), pp. 203-245

Landsman, W, Peasnell, K., Yeh, S. and Pope, P. (2006), 'The Value Relevance of Alternative Methods of Accounting for Employee Stock Options', Review of Accounting Studies, 11 (2-3), pp.203-245

McMeeking, K., Peasnell, K. and Pope, P. (2006), 'The Determinants of the UK Big Firm Premium', Accounting and Business Research, 36 (3), pp. 207-232

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Wang, P. and Pope, P. (2005), 'Earnings Components, Accounting Bias and Equity Valuation', Review of Accounting Studies, 10, pp. 387-40