The social media conundrum during corporate reputation crises

The rise of social media in corporate disclosure

Social media is arguably the most important development in information technology over the last decade. Its use has transformed the disclosure landscape, and the methods firms use to communicate important information to stakeholders. Social media represents a new platform for communication, inevitably increasing the channels available for firms to disclose information.

However, the features of this platform present corporate management with communication opportunities and risks fundamentally different from those of traditional channels. Compared to traditional disclosure channels, social media enables firms to quickly and directly reach a vast network of stakeholders with their messages. Platforms like X (formerly Twitter) have revolutionized this space, fostering multidirectional interactions and offering firms an alternative venue to communicate with stakeholders, thereby altering the dynamics and nature of corporate disclosure. (1) (2)

Investors incorporate information from multiple sources when making investment decisions. The rise and proliferation of social media have allowed capital market participants, such as corporate managers and investors, to extract and circulate information. However, the absence of regulatory oversight of information dissemination via social media means there is likely more flexibility in what information is emphasized or included. In fact, social media often encourages informal interactions that enable a greater use of subjective rather than objective information (3).

This aspect, paired with the unique features of online platforms - such as the scope and speed of information transmission - suggests that social media content can critically influence external stakeholders’ perceptions, which is then reflected in asset prices. The interaction between online and offline disclosure activities is never unidirectional. Indeed, while firms curate the functionalities of their social media communication, the latter reciprocally shapes a firm’s stance, reputation, and credibility.

Social media is predominately used during times of negative news. Research shows that negative news is much more likely to be discussed, shared, and spread on social media compared to good news (4). When negative news emerges, social media can divert attention by allowing information to be planted with selected influential users, whose conversations are then shared by their large followings.

Social media disclosure and reputational damage

In our recent study on social media disclosure and reputational damage (5), we focus on the corporate use of social media as a strategic communication tool during a major industry-wide financial scandal. We examine how X was deployed by financial institutions during the LIBOR scandal (6). This scandal constituted a negative corporate event with serious consequences for the banks involved, including substantial fines, market value losses, and reputational penalties.

Such a scandal can have direct implications for a bank’s market value and reputation, resulting in significant long-term damage. Specifically, we investigate whether banks’ disclosure on official social media channels assuages or exacerbates the negative market reaction to the scandal, and the role played individual social media users.

As in many crisis situations, scandals create uncertainty and increase the demand for information. In this information vacuum, it is important for a firm to convey its intended message ahead of rumours, unfounded speculations, or alternative news sources that could exacerbate the situation. Failing to do so could lead the public to seek information from alternative sources, leaving the firm with no opportunity to shape the narrative.

Based on reviewing the accused banks’ tweets during the LIBOR scandal, we identify two communication strategies adopted by banks in an attempt to contain reputational damage.

The first strategy involves posting scandal-related information, such as admissions of responsibility or detailed explanations regarding the banks’ role in the event, demonstrating their commitment to managing the crisis to mitigate stakeholders’ negative beliefs about the firm.

The second strategy, more predominantly observed, involves banks disclosing information unrelated to the scandal, such as positive corporate news or content related to societal topics, in the hope of diverting public attention away from the scandal or at least counterbalancing the impact of concurrent negative news.

Interestingly, we find that the second strategy, instead of attenuating, exacerbates the negative market reaction to the scandal. This evidence suggests that the market efficiently impounds the relevant negative news and discounts any attempt of impression management in scandal-ridden banks’ social media communications.

The social media conundrum

Although we find that initial tweeting activity from banks mitigated negative market returns during the scandal, this effect is short lived. Moreover, while some banks managed to quickly share positive stories and divert attention, many other social media users may spread potentially unfavourable facts or even false information. One of the much-heralded benefits of social media could also be its greatest curse: it allows everyone to share their opinion with the world. The diverse range of opinions about the banks involved in the event spread widely, potentially worsening the consequences for the institution.

This is especially true when the tweeting activity of users outside banks’ official disclosure channels is fuelled by negative sentiment. During the LIBOR scandal, negative market consequences were exacerbated by retweets and hyperlinks to external information in response to banks’ tweets. On social media platforms like X, maintaining a one-sided channel of communication is impossible; it goes against the essence of the medium. Official messages are intertwined with comments, rebuttals, claims, and counterclaims, spreading negative details and amplifying accusations.

So, to post or not to post on social media?

While higher tweeting activity from a bank can partially mitigate the negative market consequences in the short run, it’s difficult to assert how this can be translated into good social media practice. Social media platforms, with their diverse user-generated content, serve as both information sources for the company and open forums where a large number of users publicly share impressions, feelings, and details. Put simply, sharing positive news in a bid to counteract bad publicity often backfires, providing users with more material to share their negative spin, and the markets will react accordingly.

In another recent research paper on social media and capital markets (7), my co-authors and I examine the crowd-sourced investment advice platform Seeking Alpha (8). We find that both stock and options market investors react to information on Seeking Alpha. Furthermore, the sentiment of Seeking Alpha articles provides directional information for both short-term (i.e., [-1, +1]) and long-term (i.e., [+2, +90]) market returns, adding to the information already revealed through the latest earnings surprise and earnings announcement returns. The directional relationship between Seeking Alpha article sentiment and both stock and options market measures suggest the response is information driven and timely. Taken together, Seeking Alpha appears to be incremental and timely information to the stock and options market, representing a new source of value-relevant firm information.

Therefore, when it comes to the decision of social media disclosure, companies must carefully weigh the potential benefits against the risks. The key lies in understanding that social media disclosure can sometimes work against the company’s intentions, and its impact on market perception is significant and swift. Engaging strategically with these platforms, while being transparent and responsive to investor concerns, can help mitigate potential backlash and harness the power of social media to positively influence market outcomes.

References

(1) Chen, H., De, P., Hu, Y.J., & Hwang, B.H. (2014). Wisdom of crowds: The value of stock options transmitted through social media. The Review of Financial Studies, 27(5), 1367-1403. https://doi.org/10.1093/rfs/hhu001

(2) Fieseler, C., & Flech, M. (2013). The pursuit of empowerment through social media: Structural social capital dynamics in CSR-blogging. Journal of Business Ethics, 118, 759-775. https://doi.org/10.1007/s10551-013-1959-9

(3) Blankespoor, E. (2018). Firm communication and investor response: A framework and discussion integrating social media. Accounting, Organizations & Society, 68, 80-87. https://doi.org/10.1016/j.aos.2018.03.009

(4) Naveed, N., Gottron, T., Kunegis, J., & Alhadi, A.C. (2011). Bad news travel fast: A content-based analysis of interestingness on Twitter. Proceedings of the 3rd International Web Science Conference, 1-7. http://dx.doi.org/10.1145/2527031.2527052

(5) Huan, X., Parbonetti, A., Redigolo, G., & Zhang, Z. (2024). Social media disclosure and reputational damage. Review of Quantitative Finance and Accounting, 62(4): 1355-1396. https://doi.org/10.1007/s11156-023-01239-z

(6) See the EDHEC VOX article “4 questions to Xing Huan about a decade of LIBOR phaseout” (Feb. 2024) for more details on the background of the LIBOR scandal.

(7) Pei, D.S., Anand, A. & Huan, X. (2024). Seeking Alpha: More sophisticated than meets the eye. Available at: https://dx.doi.org/10.2139/ssrn.4747465

(8) Seeking Alpha was created in 2004 as a forum for the investment community to post their stock recommendations and alpha-generating ideas. It has since evolved into a multifunctional platform offering a multitude of tools for users, including reading investment advice articles, viewing earnings call transcripts, monitoring stocks and bonds, and discussing investment strategies.