Bar the occasional incident where the social media activity of companies blows up into a furor of negative publicity, it’s perhaps fair to say that most tweets and Facebook posts fly under the radar.  Research from the University of Edinburgh suggests this might not actually be the case.

The researchers used real-time data to assess the impact of social media activity on a firm’s stock price.  They found that firms are increasingly active on social media, with many posting content throughout the day.  The researchers noted that social media activity can induce both temporary price changes and also more enduring price changes, and argue that the more permanent changes are generally more desirable.

Moving the needle

The researchers found that the most impactful tweets tended to revolve around both the subject matter of the tweet and the sentiment expressed in it.  For instance, when tweets focused on positive or negative sentiment, they were often linked to a reduction in the permanent price impact and a rise in the temporary price impact on a company’s stock price.  When tweets were focused on either competitors or consumers, this impact was still visible but far less pronounced.

“Our results show the importance of interaction effects between tweet valence and subject matter in generating permanent price impact. The average negative and positive valence tweet when viewed through the lens of consumer or competitor orientation generates a permanent price impact, while a competitor-oriented tweet with a negative valence is likely to have the highest permanent price impact,” the researchers explain.

So, it seems that investors do pay attention to the social media activity of firms as this is having a direct impact on stock price movements.

“The implications of our study are clear. Investors in financial markets pay attention to firm-generated social media content and their ability to act on information at sub-second levels allows for instantaneous incorporation of social media content,” the authors continue.

Algorithmic trading

The researchers believe this is driven in large part by the rise in algorithmic traders, which are capable of scouring many sources of information, including social media, to help determine their trading decisions.  What’s more, they do all of this in milliseconds.

It’s a finding that the researchers believe should prompt marketing managers to consider the possible impact of their social media posts.  This is especially so when tweets only contain partial information and are therefore often inadequate to allow investors to make any meaningful inferences.

“Our study shows that by carefully incorporating attributes, such as valence and subject matter, marketing managers can design social media content to generate varying degrees of permanent or temporary impact,” the researchers say.