The Effect of Social Media on Trading Behavior: Evidence From Twitter

Since 2008, many firms have begun to use Twitter as a form of communicating news to consumers and investors. Twitter enables the firm to manage the information content of the tweet because of its emphasis on the 140 characters. In addition, the marginal investor who may read this “managed” tweet and react accordingly is most likely unsophisticated since Twitter is an information-pushing platform rather than an information-pulling platform such as Bloomberg. As a result, I hypothesize that using Twitter to communicate with investors actually leads to asset mispricing. I document a negative relationship between the log of abnormal volume and firm-initiated announcement tweets for both product recalls and monthly sales announcements. I also document a negative relationship between the absolute value of abnormal equity returns and firm-initiated announcement tweets for monthly sales data. Further analysis shows that this relationship holds true only for monthly sales events with positive returns and not for those with negative returns. This suggests that it is because Twitter serves to lower information asymmetry, resulting in less positive returns than before. These results have implications for understanding how dissemination and unsophisticated trading can affect liquidity and market efficiency.