Looking for the scoop on the best stock picks? Twitter might be one helpful resource, says Partha Mohanram, the John H. Watson Chair in Value Investing and professor of Accounting at the Rotman School of Management.
According to his recent paper published in The Accounting Review, there might be a lot that Twitter can tell us in terms of predicting a firm’s stock prices and earnings.
Over the years, Mohanram has watched with great interest as social platforms, such as Twitter, have taken off.
“With the rise of social media, suddenly there were new opportunities to share a lot of information rapidly and widely,” says Mohanram, whose primary research interests include financial statement analysis and valuation of growth firms.
“With the rise of social media, suddenly there were new opportunities to share a lot of information rapidly and widely.”
—Partha Mohanram, Professor of Accounting
“My colleagues and I became curious about the possible impacts on capital markets.”
Mohanram had also observed how many investors had started using Twitter to discuss investment topics and share insights. In fact, many investment-minded tweeters often incorporate cashtags — adding a dollar sign before a company’s ticker symbol — when tweeting about stocks.
He saw the value of online platforms in spreading information and providing a forum to share a range of perspectives. Still, Mohanram questioned the credibility of the information shared online — and recognized that the platform’s strict character limits made it less than ideal for discussing complex ideas in a nuanced way.
In this investigation, Mohanram and his colleagues set out to study whether Twitter might be helpful to investors — more specifically, if the platform might be able to predict whether a firm would have a strong or weak quarter.
The researchers looked at approximately 900,000 cashtag-containing tweets sent out by individual investors over a three-year period. The tweets they analyzed discussed companies that would be releasing their quarterly earnings reports within nine days — a period of time when firms are often silent and investors are especially hungry for information.
They also analyzed the nature of theses tweets — whether they contained positive or negative views about the firm, expressed original opinions or were disseminating previously shared news — and did extensive regression modeling.
Ultimately, they found that Twitter can provide value to investors.
When the researchers looked at the aggregate of the tweets, they found that Twitter users were able to predict if a company had a good or bad quarter. And tweeters, as a whole, were also accurate — and often better predictors than the market itself — at anticipating if a company would release surprising news about its quarterly earnings.
“With a small company that you might not know much about or haven’t heard of, social media can be useful and the information shared can be significant.”
-Partha Mohanram, Professor of Accounting
What’s more, Twitter was also good at predicting the company’s returns — how the stocks would be priced in reaction to a firm’s quarterly announcements.
The results aren’t too surprising, says Mohanram, especially if you consider the concept of the wisdom of crowds.
“When you gather the opinions and ideas of a large number of non-experts and compare it to conclusions reached by a small group of experts, the non-experts tend to reach a similar, sometimes more accurate, answer,” he explains.
Even if someone were to tweet out or share incorrect information online, it’s likely that other users would quickly jump in to challenge or to correct that mistake, he says.
In addition, the researchers found that Twitter’s impact was most relevant when projecting the quarterly earnings and returns of smaller, lesser-known firms.
“It makes sense that for larger companies, which are often covered by the media, the odds that Twitter will provide you with new information are quite low,” he said. “But with a small company that you might not know much about or haven’t heard of, social media can be useful and the information shared can be significant.”
Mohanram says to go ahead and refer to Twitter for advice. In fact, many analysts are already looking to social media when researching stock options. But, he warns, be careful.
“As with any investment decisions you make, don’t rely on just one source of information.”
Written by Rebecca Cheung | More Rotman Insights »