Can Social Media Directly Impact Share Price?

Posted by | June 8, 2011

We are only beginning to realize the true impact of a robust social presence in the field of Investor Relations. Even as more and more companies begin taking their Investor Relations practices social, there is a portion of IR executives who view the social media boom like a Snake Oil salesman in an old Western. They are seeing above average valuations and returns on investments, and no one can definitively say why. Are these early-adopters simply cashing in on a current trend?  Or are they laying the groundwork for how future companies will communicate with their investors?

In a recent article published by CFO Magazine, a Pace University doctoral student, Arthur O’Connor, compared the popularity of three major brands ― Nike, Starbucks and Coca-Cola ― on social media sites to their stock price movement over a 10-month period. He claims to have found an “extremely high correlation” between the data points, and that companies could use their fan base to predict how their stock will perform by as many as 30 days out.

Albeit intriguing, this theory does have its shortfalls. The study only examined companies with strong brand loyalty, and none of the companies experienced an adverse event during the evaluation period.  Furthermore, his models relied on data from Famecount.com, which aggregates data from Facebook, Twitter, and YouTube users, but does not include information from private or restricted accounts.

Only time will tell how well this metric stacks up to some more deeply engrained analyst numbers, but O’Connor sees his study as a starting point for exploring the effects social media has on a brand’s strength.

But what does this mean for Investor Relations?  I think we are past the point where a company can completely ignore social media. We are living in a Web 2.0 world where each user can insert his/her opinion, good or bad.  This presents companies with an opportunity to create a dialogue directly with investors and analysts.  And with LinkedIn’s share price doubling on day one of its IPO, it seems investors are just as optimistic.

While the results of O’Connor’s study are interesting, it’s difficult to discern if popularity on social sites has any impact on stock prices. The model needs to be further expanded to include less recognized brands and a more comprehensive collection of social media networks. Only then will we gain a more accurate insight into the value of good social media “buzz.”  In any case, IR executives have found value in social media and will have to wait and see if they’ve invested in Panacea or been swindled by a new-age Snake Oil salesman.

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