IR Papers: Tweeting tweaks trading

Mar 29, 2017
<p>A roundup of academic research from the world of IR studies</p>

‘Congratulations to Ted Sarandos and his amazing licensing team. Netflix monthly viewing exceeded 1 billion hours for the first time ever in June… Ted, we need even more!’

Netflix CEO Reed Hastings’ 2012 social media post caused Netflix’s stock to soar. But it also prompted the SEC to take a hard look at firms’ social media practices and ultimately led to their official sanction as a financial information source.

Still, you don’t see many posts quite like Hastings’ these days. ‘Before the 2013 SEC regulation, financial tweets were mostly self-congratulatory hype,’ says Mohamed Al Guindy, a PhD candidate in finance at Queen’s University in Ontario. ‘They rarely provoked a market response.’

Five years later, they most certainly do. Guindy says that’s because the regulation forced CEOs, now directly liable for content, to ensure more accurate and informative Twitter accounts. And doing so has worked out pretty well for companies: Al Guindy’s research shows that after the regulation, financial tweets correspond to an increase in trading volume and an almost 20 basis-point increase in returns. ‘Companies are tweeting better and markets are responding,’ he observes.

Another key finding following the SEC regulation is that positive news wire corporate press releases accompanied by financial tweets correspond to higher returns (roughly three times more) than corporate press releases alone. ‘Whenever you have good news, you should combine all possible communication methods,’ advises Al Guindy.

He points out that tweeting benefits smaller companies the most, lowering their cost of capital by as much as 30 basis points. ‘Smaller companies don’t have to rely on [third party] media,’ he says. ‘They can deliver their message themselves – and markets will listen.’

Obfuscation works

Few exult in pure drivel quite as much as UK corporate directors responsible for preparing executive remuneration reports. Unfettered by plain English rules, their jargon-enriched prose ranges over sometimes a dozen pages of the annual report, and typically requires post-graduate-level reading skills to extract insight. Drivel this pure is no accident. Indeed, according to a recent study, it’s intentional. And it works.

‘The more unreadable a compensation report, the less shareholder dissent on say-on-pay votes,’ says study co-author Bo Qin, associate professor of accounting at the University of Melbourne. ‘In cases of excessive executive pay, a one standard deviation in our obfuscation score decreases dissent almost 10 percent from the median.’

Still, Qin warns that the obfuscation strategy can sometimes backfire. ‘It depends on your shareholder structure,’ he says. ‘The effect diminishes as institutional ownership increases and [reverses] when the majority of a firm’s shares are held by institutional investors.’

World o’ research

• Investors react less favorably to bad news disclosed on a company’s Facebook page than on its IR website, according to investigators at California State University. They speculate that’s one reason for social media’s dearth of bad news.

• When hiring an IR firm, consider the pay for performance model in vogue with CEOs. A Concordia University study finds a positive link between payment in stock and future client stock market performance.

• Why do so many CEOs publicly espouse the shareholder value principle when it fundamentally undermines their own power and privilege? Because it pays, say researchers in the US. ‘Top corporate managers’ use of language that is congruent with a prevailing norm [for corporate governance] leads the board to evaluate the managers more favorably and to grant a higher level of compensation,’ they write.

This article appeared in the spring 2017 issue of IR Magazine

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