Financial social media has transformed the way investors share opinions, access information, and interact with markets. While there is extensive evidence that social media affects investor behavior and asset prices, a fundamental question remains: does social media also influence corporate decisions? In our paper, Can Social Media Inform Corporate Decisions? Evidence from Merger Withdrawals, forthcoming in the Journal of Finance, we provide evidence that it does.
We study one of the most consequential corporate investment decisions, mergers and acquisitions (M&As), and show that the social media sentiment reaction to a merger announcement is a strong predictor of whether the deal will ultimately be completed or withdrawn. Our core finding is striking: a one standard deviation decrease in abnormal social media sentiment after a merger announcement is associated with a 0.64 percentage point greater likelihood of merger withdrawal, representing roughly 16.6% of the baseline withdrawal rate in our sample. Importantly, this effect is not explained by the stock market’s reaction to the deal, traditional news media coverage, or analyst recommendations.
Measuring Social Media Sentiment
Our analysis uses a sample of U.S. M&A announcements from 2010 through 2021 matched to firm-day sentiment measures from a major financial social media platform, StockTwits. StockTwits is well suited to this question because users explicitly discuss firms using “cashtags” that indicate the firm’s ticker (for example, $AAPL for Apple), and the investor discussion on the platform is both in real time and high frequency. Our dataset includes over 250 million StockTwits messages and over 6,438 announced deals. We measure abnormal sentiment for each merger announcement by comparing the average sentiment of messages in the days immediately following the announcement (days 0 through 3) relative to a benchmark period before the announcement became public.
Social Media Contains Unique Information
Do social media sentiment reactions aggregate other sources of information, or does social media contain new information? We find social media information is distinct from other sources. Conditional on a positive stock market reaction to the deal, the StockTwits signal is only slightly more likely to be positive than negative: 55% of positive CAR deals have positive abnormal sentiment versus 45% with negative abnormal sentiment. Thus, a positive social media sentiment reaction to the merger announcement is not simply a reflection of the market reaction. The same broad conclusion holds for traditional news sentiment and analyst recommendations: there is significant dispersion in abnormal social media sentiment within both positive and negative values of these other signals, implying unique variation in the social media measure. READ MORE »
