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44 ORGANIZATIONS AUTUMN 2013 STANFORD BUSINESS MARKETS Breaking BOUNDARIES Through the Market Noise A study suggests that tweeting can measurably increase the market liquidity of little-known stocks. BY EDMUND L. ANDREWS IIt almost goes without saying that Twitter has changed the way corporations communicate. Despite much early sneering about the 140-character limit of a tweet, thousands of very serious companies fire off tweets daily about their latest news. In April, the Securities & Exchange Commission gave additional guidance to firms thinking of using social media as a means of disclosure that made it more likely firms will start using it. And in September, Twitter itself disclosed its plan for an initial public offering of stock by tweeting the news to its roughly 25 million followers. But does tweeting have any impact on investors? A new empirical study suggests that it does. In particular, Twitter seems to help little-known companies overcome the natural bias of traditional news media toward bigger companies that already get buzz. The researchers, who include Elizabeth Blankespoor, an assistant professor of accounting at Stanford GSB, found that tweeting measurably increased the market liquidity of stocks that normally get little attention. That’s important for both practical and theoretical reasons. As a practical matter, corporate investor-relations departments are pouring money into Twitter and other “push” technologies without completely knowing how well they work. On a more theoretical level, the findings further undermine a key assumption about how markets work. The traditional assumption has been that markets instantly assimilate every new scrap of information as soon as it becomes public. If a company announces its latest earnings over the PR Newswire, for example, the traditional view is that the information reaches everybody in the market immediately. Many analysts had already found that the real world was messier than that. In

BOUNDARIE IES ELIZABETH BLANKESPOOR Exploring the message and the medium Photograph by Amy Harrity the real world, investors get much of their information from the news media — the Wall Street Journal, news services such as Bloomberg, and television networks such as CNBC. And news organizations pay much more attention to high-visibility companies because those are the ones that attract bigger audiences. Blankespoor teamed up to study Twitter’s market impact with Gregory S. Miller, an associate professor of accounting at the University of Michigan, and Hal D. White, an assistant professor of accounting at Michigan. They suspected that Twitter and other technologies were changing the old rules. For the first time, companies could communicate with investors directly and instantly. Twitter is hardly the only direct-access technology in use. Many companies also reach investors through mass email alerts, RSS feeds, and Facebook. But for many investor-relations departments, Twitter has become the social networking tool of choice. To measure Twitter’s impact, the researchers studied one particular form of corporate tweet: those that contain links to a company’s full original announcement. The researchers compiled tweet data from 2007 through September 2009 for 102 information technology companies (on the theory that IT firms were likely to be early Twitter adopters). They then correlated the tweet activity with trading data about the liquidity of each company’s stock.