Does Online Chatter Really Matter? Dynamics of User-generated Content and Stock Performance
Seshadri Tirunillai and Gerard J. Tellis , 2011, 11-107
User-generated content in online platforms (or chatter) provides a valuable source of consumer feedback on market performance of firms. This study examines whether chatter can predict stock market performance, which metric of chatter has the strongest relationship, and what the dynamics of the relationship are. The authors aggregate chatter (in the form of product reviews) from multiple websites over a four-year period across six markets and 15 firms. They derive multiple metrics of chatter (volume, positive chatter, negative chatter, and ratings) and use multivariate time series models to assess the short- and long-term relationship between chatter and stock market performance. They use three measures of stock market performance: abnormal returns, risk, and trading volume. The findings reveal that two metrics of chatter can predict abnormal returns with a lead of a few days. Of four metrics, chatter volume shows the strongest relationship with returns and trading volume, followed by negative chatter. Whereas negative chatter has a strong effect on returns and trading volume with a short “wearin” and long “wearout,” positive chatter has no effect on these metrics. Negative chatter also increases volatility (risk) in returns. Finally, offline television advertising increases the volume of chatter while decreasing negative chatter. These impacts prevail even after controlling for analysts’ forecasts, media citations, advertising, and new product announcements.
These results show managers that chatter is an important metric to follow to gauge the performance of their brands and products. Because chatter is available daily and hourly, it can provide an immediate pulse of performance that is not possible with infrequent sales and earnings reports.
The fact that negative chatter is more important than positive indicates that negatives are more diagnostic than positives. Textual analysis of negative chatter could signal potential problems or discontent among consumers that deserve serious immediate attention. Taking corrective action could avert long-term damage to shareholder value. For example, the authors’ simulation indicates that unmitigated negative chatter can lead to an overall loss in brand value of $3.3 million over two weeks.
Because offline television advertising increases the volume of chatter while decreasing negative chatter, firms can manage the content of television advertising to appropriately influence the issues raised in negative chatter.
Overall, this study highlights the importance of informational content of chatter to investors and other stakeholders. Portfolio analysis indicates that buying and selling stocks based on the valence of chatter can lead to an average gain of $27 million over one year even for only six markets and 15 brands.
Seshadri Tirunillai is Assistant Professor of Marketing at the Bauer College of Business, University of Houston, and Gerard J. Tellis is Professor of Marketing, Director of the Center for Global Innovation, and Neely Chair in American Enterprise at Marshall School of Business, University of Southern California.
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