Are firms that engage the public via Twitter more expanding (via exposure) or shrinking (via adverse social media frenzy) their opportunity sets? In their January 2020 paper entitled “The Social Media Risk Premium”, Amin Hosseini, Gergana Jostova, Alexander Philipov and Robert Savickas investigate relationships between firm Twitter activity and stock return. Their data include firm Twitter presence, and level and nature of activity, as well as responses from followers. Using these Twitter data, accounting data and stock returns for all publicly held U.S. firms during 2007 through 2016 (33,445,318 tweets, generating 25,603,977 replies, 161,548,941 retweets and 265,738,508 likes), they find that:
- Over the sample period, stocks of firms with Twitter accounts outperform those without by gross monthly average 0.59%. Adjusting for firm size, book-to-market ratio and stock price momentum reduces outperformance to 0.53%. Using gross monthly alphas from widely used factor models of stock returns, outperformance of firms with accounts is in the range 0.39% to 0.52%.
- The Twitter premium:
- Comes almost entirely from market outperformance by firms with accounts.
- Has low correlations with premiums for other firm/stock characteristics, the highest being 0.29 with a profitability factor premium.
- Is stronger among firms that are small, have high idiosyncratic volatilities, high analyst earnings forecast dispersions and low institutional ownerships.
- Relates positively to tweeting intensity. For example, the third of small Twitter firms with the highest monthly change in tweeting beat the third with the lowest by an average 0.67%. For medium-sized (large) firms, the spread is 0.48% (0.21%). These spreads do not reverse the next month.
- The Twitter premium 12-month moving average is positive throughout the sample period, peaking in 2008-2009 and 2015-2016.
- Results are consistent with the hypothesis of a reward for holding companies with high social media risk.
In summary, evidence suggests that firms using Twitter carry a social media risk rewarded by higher stock returns compared to firms not engaged on Twitter.
Cautions regarding findings include:
- Given the shortness of the sample period and rapid growth of Twitter use, data are somewhat stale.
- Returns are gross, not net. Accounting for frictions from entering and exiting positions (especially for a strategy based on monthly tweeting intensity) would reduce returns and alphas.
- Continual collection of data on tweeting activity for a large number of firms is problematic.
