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Tuesday, March 27, 2018
Tom Snee

Businesses and organizations spend a lot of time and energy monitoring what customers say about them online, but do those conversations on social media affect the value of a company?

While earlier studies suggest a tentative link, a new award-winning study from the Tippie College of Business suggests social media sentiment has little impact on stock returns.

“Abnormal returns were found to be unrelated to social media sentiment except for one industry, computer and electronics manufacturing,” says study co-author Tom Gruca, the Henry B. Tippie Research Professor of Marketing in the Tippie College of Business.

The study team measured social media sentiment using the monitoring site www.socialmention.com, collecting daily data on the social media sentiment on such platforms as Facebook and Twitter of 180 firms in ten industries from 2012 to 2014. Researchers then looked to see if that sentiment had any effect on those firms’ monthly and daily stock returns during the same period.

Would a preponderance of positive social media comments lead to higher stock returns? Would negative comments have an impact on the firm outside the public relations office?

For the most part, no. The study found little significant relationship between positive online comments and increased stock returns, or negative comments and decreased stock returns. The researchers suggest this is because social media sentiment reflects news that investors have already factored into the price. Knowing what a company’s customers are saying does not provide any additional insight into where the stock is heading over the following days or months.

The one exception was computer and electronics manufacturing firms, which seemed to show a marginal change in stock returns reflecting social media comments. Gruca speculates this effect is caused by the fact that companies that make products like computers, gaming consoles, handheld devices, and the like encourage fans to talk about the products online. These conversations build awareness of new products and create desire for those who have not yet purchased them. This online chatter may be more immediately informative for some traders than sales figures, which won’t be known until the quarterly conference call.

The paper, “Social Media Sentiment and Firm Value,” recently received the Distinguished Best Paper Award from the Marketing Management Association Conference, which will be held in Chicago in April. The award will be presented to lead author Chanchal Tamrakar, a Tippie alum who now teaches at Georgia Southern University in Savannah, Georgia. It was also co-authored by Tae-Hyung Py, a Tippie alumnus now teaching at the University of Idaho.

CONTACT: Tom Snee, Office of Strategic Communication, tom-snee@uiowa.edu, 319-384-0010.