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Ideas for Leaders #140

How Twitter Levels the Information Dissemination Playing Field

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Key Concept

All businesses want to increase their visibility, but for small businesses this is even more of a concern. Could Twitter be the key to getting your firm noticed by investors? According to new research, small businesses that use Twitter to communicate with investors may experience an increase in the demand at market value of their stocks, helping to level the playing field between them and larger firms.

Idea Summary

Social media, and particularly ‘direct access technologies’ such as Twitter, Facebook, email alerts, etc., have firmly marked their place in the business world as effective tools with which to engage customers. Now, research suggests that they can do even more than that; Twitter, specifically, can be used to increase the market liquidity of stocks that would otherwise get little attention.

In order to understand how, it is useful to note the traditional assumptions about how markets work; it is assumed that markets instantly assimilate every bit of new information when it becomes public, such as through press releases, and that information reaches everybody in the market immediately. However, in the real world, investors get much of their information from the news media, which tend to pay more attention to high-visibility companies.

Investors have limited time and resources, so it would be impossible for them to process information from all the various available news sources. As a result, firm disclosures do not always reach a broad set of investors, particularly in the case of firms that are not highly visible, thereby creating information asymmetry. 

Twitter, it seems, is changing this tradition by ‘levelling the playing field’ between larger, already-visible companies and smaller, less-visible ones; researchers from Stanford Graduate School of Business and Ross School of Business examined when firms tweet information compared with when they don’t, finding that when they choose to tweet an event, their market liquidity improves. In addition, they found that bid-ask spreads (i.e. the amount by which the ask/offer price exceeds the bid) narrowed significantly for less-visible companies and depths widened; but, larger companies did not see any impact, thereby potentially giving others a better chance to compete with them.

Methodology: The researchers compiled tweet data from 102 companies from 2007–2009, focusing on one particular form of corporate tweet: those that contained links to a company’s full original announcement. They then correlated the tweet activity with trading data about the liquidity of each company’s stock, immediately before and after each news announcement.

Business Application

These are important findings for smaller companies in particular, as they can use Twitter to overcome the natural bias of traditional news media toward bigger companies.

“Twitter is a channel that [small firms] can use to more broadly disseminate their information,” says one of the researchers, Elizabeth Blankespoor. She advises that these firms should definitely take tweeting seriously. Some firms still dismiss new technologies as it is not the way they may have done things in the past, and is not the “normal” way of communicating with investors; but, Blankespoor adds, “Twitter can be extremely helpful for firms that are using it, especially if they can’t get attention from traditional media outlets.”

In addition, these findings also indicate that investors should also considering utilizing Twitter as a way to lower their search costs to get information about firms. Again, the benefit seems to be greater for smaller investors who may not have as much of a budget for information collection as institutional traders. By following smaller firms on Twitter, they do not have to worry about not getting enough, or missing out any, information about them.

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Authors

Institutions

Source

Idea conceived

  • 2013

Idea posted

  • May 2013

DOI number

10.13007/140

Subject

Real Time Analytics