In a previous post, we discussed an article than analyzes the impact of TV news on stock prices. Today, we consider a different form of information dissemination: Direct-Access Information Technology (DAIT) such as press releases through Twitter, RSS feeds, e-mail, etc.
Rise of the DAITs
Firms have adopted these channels in recent years to overcome the information asymmetry between different investors: those who follow traditional firm news outlets, and those who do not. Why would firms have an interest to make sure all (potential) investors have the same information? Because investors who worry that others are better-informed are reluctant to trade, which leads to lower market liquidity, which leads to a higher cost-of-capital for the firm.
In their 2014 Accounting Review paper “The Role of Dissemination in Market Liquidity: Evidence From Firms’ Use of Twitter”, Blankespoor, Miller, and White analyze the impact of social media use on stock liquidity. Their sample covers 85 firms disseminating information via Twitter, and they measure dissemination in three ways:
- whether the firm submits a tweet with a hyperlink to the press release during a three-day window around press releases,
- the number of retweets with the hyperlink,
- and the number of clicks on the hyperlink.
The main idea for the second and third measure: See whether potential investors actually pay attention to the tweet!
… improves market liquidity
Blankespoor’s measure of market liquidity is the abnormal bid-ask spread (difference between the average spread during the window and in the pre-event window) and abnormal depth. The firms for the study were the technology firms since they were the early adopters of technology. Table 1 presents the main result.
|Abnormal spread||Abnormal depth|
|Tweet w/ hyperlink||-0.0104||0.0060|
|No. of retweets||-0.0036||0.0076|
|No. of clicks||-0.0029||-0.0029|
Table 1 – Impact of dissemination on market liquidity. Information taken from Table 4 and 5 of Blankespoor et al. (2014). Bold font indicates statistical significance at the 5% level or higher. Stock- and firm-specific control variables are included in the regression.
How big is the effect?
Table 1 shows that Blankespoort et al. (2014) find convincing evidence for the hypothesized relation: all dissemination measures have a negative and statistically significant impact on spreads. So, more dissemination leads to lower spreads, which indicates higher market liquidity. The impact for depth is weaker. The economic magnitude of the effect is also substantial: On average, there are 141 clicks on the hyperlink. This indicates that abnormal spreads decrease by 0.0029*141=0.41 percentage points – and with bid-ask spreads usually ranging around 1% even for less liquid stocks, such a decrease is dramatic!
Take-away: Using social media improves stock liquidity
In summary, Twitter has become an important tool for reducing the information asymmetry among investors – and smart use of social media improves stock liquidity, leading to lower cost-of-capital for firms. Regulators have recognized this: the U.S Securities and Exchange Commission (SEC) also encourages firms to use DAITs to release information directly to the public.