Academic journal article International Journal of Business

The U.S. Market Reaction to Regulation of Social Media Disclosures

Academic journal article International Journal of Business

The U.S. Market Reaction to Regulation of Social Media Disclosures

Article excerpt

ABSTRACT

This paper examines the U.S. stock market reaction to events leading up to the SEC's decision to regulate (and allow) the use of social media for firm disclosures. By using an event methodology, we compare the market reaction for firms that use Twitter extensively with a set of control firms. Measures include size-adjusted cumulative abnormal returns (CARs), bid-ask spread, analyst forecast revision and dispersion as proxies for market reaction. Results show that firms actively using Twitter for financial disclosures suffered negative CARs after the final event when the SEC released its final guidance on social media disclosures.

JEL Classifications: G3, M48, M41

Keywords: accounting; regulation; disclosure; corporate governance

The authors thank Professor Elizabeth Blankespoor for providing the list of firms used in her study. This paper won the Vernon Zimmerman Best Paper Award at the Twenty-Eighth Asia-Pacific Conference on International Accounting Issues.

I. INTRODUCTION

Traditionally, firms relied largely on the press to shape their "information environments... by creating new information through journalism activities" (Bushee et al., 2010). However, "many small firms face significant challenges in improving visibility" (Bushee and Miller, 2012) through such traditional news channels. The widespread accessibility of social media thus gives every stock issuer--small or large--the possibility of reaching out to its investors. According to Chen et al. (2011) and Yu et al. (2013), social media sentiment has a stronger correlation with stock returns than traditional media sentiment.

However, most research on Internet corporate reporting focuses on company website disclosures rather than on social media. Further, the Securities and Exchange Commission (SEC) did not provide guidance on social media disclosures previously, implying that social media are not proper communication channels.

The SEC first issued guidance on the use of electronic media to ensure "full and fair disclosure to investors" (SEC, 2000). In October 2000, the SEC published Regulation FD (Reg FD), which sought to improve information asymmetry, and discouraged issuers from treating "information as a commodity" (Fisch, 2012).

Eight years later, it released guidance to explain how company websites should be used in disclosing "important company information" (SEC, 2008), and stated that websites should comply with Reg FD. Yet, none of these addressed social media as a viable disclosure medium--an inadequacy that later generated much uncertainty.

In July 2012, Netflix CEO Reed Hastings posted on his personal Facebook page that Netflix has crossed "1 billion viewing hours for the first time," without an accompanying 8-K filing. Just hours after the post, Netflix's share price increased by 6.2%, and then by 13.4% the next trading day (Spangler, 2012). This generated debate about whether the post violated Reg FD. A collective conclusion was then drawn that the SEC needed to provide clear guidance on "whether and how social media sites can be compliant means of distributing financial information" (Mont, 2012). The issue was finally closed in April 2013 when the SEC released an investigation report, which detailed its decision not to take action against Netflix, and additionally provided guidance to organizations on the use of social media. After this report was released, the National Investor Relations Institute (NIRI) found that half of the survey respondents who had not previously used social media had plans to reassess their IR programs. 21% of this group cited the "recent disclosure guidance from the SEC" as the reason for this change (NIRI, 2013). In anticipation of this increase in social media use, Bloomberg announced that it would incorporate the firms' twitter feeds in its terminals, to provide "investors and traders with simple solutions to follow tweets about companies, industries and markets" (Q4 Web Systems, 2013). …

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