Corporate Social Media: How Two-Way Disclosure Channels Influence Investors

Abstract

I examine how a firm’s engagement with individuals on social media affects the firm’s reputation and its attractiveness as an investment. I focus on a case in which a Twitter user criticizes an application of managerial judgment in a firm’s financial disclosure and firm management chooses whether and how to respond. I collect data using two experiments in which I vary the number of retweets the criticism accumulates and the firm’s response strategy. Results of my experiments suggest the following. First, a third-party criticism, even one that is unfounded, can cause investors to question their positive reactions to a firm’s disclosure (relative to never viewing the criticism). Second, a firm’s reputation and attractiveness as an investment further depend on the number of retweets the criticism accumulates. Third, following a third-party criticism, managers can use Twitter to repair investors’ perceptions by addressing the criticism directly or by redirecting attention to more positive highlights from the firm disclosure (relative to not responding). Overall, my study advances our understanding of how a firm can effectively manage investors’ perceptions by participating in, rather than abstaining from, conversations about the firm on social media.