The Good, the Bad, and the Social Media: Financial Implications of Social Media Reactions to Firm-Related News

Abstract

Firms and investors often react to financial news on social media. However, how they react to news of different nature and whether their reactions influence the stock market are far from clear. Employing data on financial news, tweets posted by firms and investors, and daily stock prices, we find that firms are more responsive to news with positive sentiment and low uncertainty, whereas investors are more responsive to news with high uncertainty. Moreover, the increased tweeting activities of firms and investors can improve the stock returns of firms. We further show that investors’ social media reactions to news and the subsequent influence on stock returns depend on firm size. This paper provides a fuller picture of how firms, investors, and the stock market react to financial news, and reveals the nuanced interactions among them. We discuss how firms and investors can better leverage social media to improve stock performance.

Keywords: news, social media, sentiment, uncertainty, stock return, information environment