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It's long been an observation of many smallcap manager and investors that the mainstream media generally struggles to cover the sheer volume of smaller company news stories in any depth and that this has major knock-on implications in terms of liquidity and ultimately the cost of financing for smallcaps or, as they are sometimes collectively known, “the long tail”.

In that respect, we were fascinated to hear of the latest research paper coming out of the University of Michigan entitled “The Impact of Managerial Dissemination of Firm Disclosure”. Even in the US market, it seems that this apparent “media failure” is present in that the traditional information intermediaries such as the news agencies and newspapers typically don’t have the time or resources to cover smaller companies, contributing to the liquidity problems that such companies face.

The research analysed the impact of Twitter as an investor communication channel. Scepticism about the informational content and value of a 140 character ‘tweet’ is, of course, understandable but the clear and fascinating conclusion from this latest research was that greater "tweeting" by smaller firms during news event windows was positively correlated with lower bid-ask spreads, after controlling for other factors. More generally, this work suggests that emerging new Web channels could play a role in addressing the underlying information asymmetry which seems to be at the root of the smallcap liquidity problem.

To find out more about this research, we spoke with Hal White, one of the researchers at the University of Michigan alongside colleagues Elizabeth Blankespoor and Gregory Miller.

Hal, thanks for joining us. Could you please talk a bit about the background of the research team?

Sure. We are all from the Ross School of Business at the University of Michigan. Beth is a fourth year accounting PhD student, Greg is an associate professor of accounting that joined Ross two years ago after spending ten years at Harvard Business School, and I am an assistant professor of accounting who joined Ross two years ago after spending one year at Michigan State University. All three of us have strong research interests in firm communication with investors.

What inspired this research project?

We started talking about this project last summer. We were observing the role of social media in society in general and started thinking about its potential in the financial markets. While a lot of companies were talking about the potential benefits of Twitter, most of the focus was on the potential for firms to gather information by engaging the public in open dialogue and the implications of such a policy. As we started looking into it more, we found that although there were certainly firms using Twitter for two-way communication, a lot of firms were also using Twitter to provide updates on firm news. In fact, for our sample, about three-fourths of the tweets contain hyperlinks, which indicates that a lot of the tweeting happening on Twitter is, at least for now, related to dissemination of news.

At the same time, we knew that news sources face resource constraints as to the amount of information they can adequately provide to the public, and because of this, tend to focus on larger, more visible firms. Recent research has indicated these constraints have made it hard for smaller firms to attract attention, which in turn has a negative impact on funding. In addition, there have been large reductions in both sell-side analyst coverage and the number of news outlets from which investors can get information. Given all of this, we were left wondering how smaller firms could get their information out to investors. So, we thought it would be interesting to see whether firms, particularly small, less visible firms, could use Twitter to overcome the dissemination constraints of the news services.

What would you describe as the key finding from the report?

I think the key finding of the paper is that managers in firms that aren’t getting a lot of attention from the press can use new information technologies that allow direct access to investors, or direct-access information technologies (DAITs), to get information to investors, which results in lower information asymmetry and therefore better liquidity for the firm.

I’d also like to add one point here, and that is that we believe a fundamental and likely permanent shift in the way firms interact with their investors is taking place. Dissemination is just one part of the shift. For example, firms like Cisco (NASDAQ:CSCO), Delta (NYSE:DAL) and Whole Foods (NASDAQ:WFMI) are engaging investors and consumers in communication in an attempt to monitor their brand, provide customer service and distribute real-time information to the public. A handful of other firms, like Google (NASDAQ:GOOG), have recently decided to stop providing news releases via newswires. Instead, they have opted to direct interested parties to their website for news updates.




This could completely change the landscape of IR, as investors sign up for Twitter or some other DAIT, such as RSS feeds or email alerts, to get information from the firm on a timely basis – a role traditionally filled by newswires. What Google has effectively done is ‘cut out the middle man’ while saving money that was spent on newswire services. It will be interesting to see how this evolution takes shape.

Can you describe the underlying methodology for the work in layman’s terms?

We started with a sample of technology firms, since these are often early adopters of technology and we wanted to ensure that our firms are actively engaged in Twitter. We then looked at tweeting patterns for these firms. We found that although there is a relatively small and consistent amount of tweeting throughout the year, there is a strong propensity for these firms to tweet around news events, namely press releases issued by the firm. We then looked at the tweets to determine the content. We found that almost 80% of the tweets contain hyperlinks, which indicates that the tweets are disseminating information by directing followers to online information. In particular, these tweets generally contained a tag line about a press release along with a hyperlink that followers could click on to read the entire release.

We then looked at whether these tweets had a significant impact on the information environment of the firm. So, for our sample of tech firms that use Twitter regularly, we looked at how the bid-ask spread and market depths changed around news releases when firms tweeted their press releases compared to when they did not. We found that when they tweeted the release, spreads narrowed and depths widened, indicating lower information asymmetry. We then split our sample into two groups – those that are highly visible and those that are not – using various proxies for visibility, such as the market value of the firm and analyst following. We found that tweeting was clearly beneficial for the less visible firms, but not so much for the more visible firms that are already getting attention.

You focused specifically on companies in the technology sector given that they tend to be “early adopters”. Does this introduce any bias into the results, in your view? Are there any other factors that might have skewed the results?

With respect to biases, this is a great question, and one we have thought a lot about. In short, we have conducted a battery of tests to address potential biases, and we feel comfortable with our findings. As for our focus on tech firms, we don’t feel that this should create any bias other than the fact that tech firms might have more tech savy investors, thus a broader audience to disseminate information. However, that’s not to say that firms in other sectors couldn’t get broad follower coverage. If you think about it, when conference calls – another technological shift in firm-investor communication – first started to catch on, it was the tech firms that led the way. Thus, there were likely more participants initially that took part for tech firms, but now we see that all sorts of firms garner broad participation in conference calls. In fact, I think some firms might argue that there’s too much participation.

In analyzing bid-ask spreads, how effectively were you able to control for other variables such as new press / analyst coverage or other market conditions?

As with biases, it is critical to our paper that we adequately control for competing explanations for our results. Accordingly, we control for a myriad of different factors. First, we control for the amount of information in the press release by looking at the length of the press release and the associated market reaction, which also helps control for any differential effects caused by whether the information was good news or bad news. Second, we control for the presence of information intermediaries that might be involved in disseminating the information, that is, the number of analysts following the firm, the number of institutional investors holding shares in the firm, and the number of news sources that publish the press release. Third, we control for market conditions, such as price, volatility and volume. Finally, we control for firm-specific characteristics, such as growth opportunities, size and number of shareholders. Our results hold even after controlling for all these factors. We have also tried several other model specifications and found consistent results.

Why Twitter? It seems like you chose it because there’s more data available to analyze, but presumably a similar analysis could be applied to corporate blogging, webcasting and email alerts?

Our intent was to determine whether firms could overcome dissemination channel constraints using newly developed technology. That is, in addition to putting out a press release over the wire, we wanted to know if managers could do something that would broaden the coverage, particularly for firms that generally do not get as much attention from the press. It seems IR departments have embraced Twitter in particular for this task. This is most likely because Twitter has been specifically designed to be compatible with SMS messaging, so that tweets can reach recipients on their mobiles in real-time. After all, nowadays we want up to date information as quickly as possible, particularly investors, but we’re on the move and not always able to be in front of our computers.
Other media, such as blogs, could certainly be used to disseminate information, but when we looked at blogs, we saw that there was also a lot of opinion and two-way communication rather than a strong focus on distribution of press releases. Also, we didn’t see a lot of firms using webcasts, but this is something we’re starting to look into.

How are companies using Twitter most effectively in your view? Are there clear differences between the approaches of particular companies (for example, do small caps use Twitter differently than do large caps)?

This is still very much an emerging practice; after all, Twitter has only been around for a few years. I think firms are still experimenting with a lot of different approaches, and I’m sure as more and more firms engage Twitter, we’ll start to see standard practices form. Our focus was on analysing the impact of Twitter as a dissemination tool, and we conclude that the benefit from dissemination occurs mainly in less visible firms who are using Twitter as an additional way of delivering traditional disclosure. However, this is not to say that firms aren’t deriving other benefits, such as reducing the cost of a wire service or driving more traffic to their website, where presumably investors will learn more about the company. Those benefits could be accruing to large firms as well.

I can think of a number of large firms that have garnered a lot of attention for their creative approaches to using Twitter. Delta (NYSE:DAL), for example, has set the customer service benchmark high in the airline industry. Apparently, it has a group of customer-service employees that monitor passenger tweets from 8:00am to 9:30pm every day in an attempt to address complaints in real-time – complaints from passengers that have delayed or cancelled flights that need rebooking, those with lost luggage, etc. Not surprisingly, Delta has received a lot of accolades for this strategy.
This research seems encouraging in suggesting that companies may be able to take matters into their own hands by using technologies like tweeting to disseminate their message. Is that too strong a conclusion?

That is exactly the right conclusion, at least, for smaller, less visible firms. Twitter is a free service to join for both firms and investors, so establishing the channel is relatively costless. The biggest hurdle we see is getting investors to follow the firm on Twitter or subscribe to RSS feeds. Although Twitter has become a household name, many people are still not sure how to use Twitter, and thus are somewhat wary of using it. As technologies like Twitter grow, this hurdle should become less of an issue. Fortunately, we’re seeing Twitter usage grow at an unbelievable rate. For example, in 2007, there were roughly 400,000 tweets posted per quarter. In comparison, there were 4 billion tweets posted in the first quarter of 2010, which is quite impressive!

In the research, you distinguish between the use of non-traditional DAIT channels like Twitter for dissemination as opposed to disclosure, observing that it is primarily used as a dissemination tool? Can you explain what you mean by this?

Sure. I guess I should first say that the distinction is very subtle, yet very important. When you think of the typical disclosure process, the firm creates a press release with the help of its IR staff and lawyers. It then gives the release to a newswire service, files it with the SEC and/or posts the information on its website. This is what we mean by disclosure. The firm has disclosed information, but it’s not clear that anyone will ever see it. It must be distributed to the intended recipients. When the newswire service sends the information out to the public, or the firm sends the information out to investors using DAITs, this is dissemination.

We make this distinction in this study because we are not interested in whether information released solely on Twitter versus another channel changes a firm’s information environment. What we want to know is once information has already been publicly released, is there a benefit to firms more widely disseminating the information. Thus, it’s important to control for the factors mentioned above related to the amount of information disclosed, the number of information intermediaries, market conditions, etc.

What do you see as potential fruitful avenues for future research? What will you be focusing on and what would you like to see others explore?

I think as technology continues to reshape the company-investor communication landscape, there will be all sorts of interesting questions that can be asked. For example, we’re seeing more and more firms using technology to hold virtual annual meetings, and as we talked about earlier, some firms are starting to make webcasting a more integral part of their communication strategy. The determinants and consequences of these actions would be exciting issues to explore.

In addition, technologies are allowing investors to talk to one another in a more efficient manner, which can lead to huge impacts on a firm’s reputation.

Take the Toyota recall as an example. The news spread so fast over Twitter and became such a force that Toyota set up a Twitter page to engage consumers in dialogue to help repair their image. It’s really amazing to think of such a large company using a medium that didn’t exist just a few years ago. This provides a great setting in which to look at the manner in which firms communicate with investors and consumers in a way that has never before been possible, and examine the ways in which these interactions impact firm value.



Do you see any policy implications to the work? Should Government be encouraging companies to use these technologies?

The SEC has been a strong proponent of firms using Internet technologies to disseminate information to investors for many years. In fact, in August 2008, the SEC reiterated their position when it released guidance on the use of corporate websites. In the release, the SEC encourages firms to use ‘push’ technology to get their news out to investors in a timely manner. That is, firms should post relevant information to their website in a timely fashion, then ‘push’ the information using direct-access technologies, such as Twitter, RSS feeds, or email alerts as opposed to making the investor regularly check the website for new information to ‘pull’ down.

I would also like to point out that, while we agree with the past SEC support, we do believe that governments could do more to encourage the use of new technologies. For example, in the US, many managers worry about the legal consequences of using these new technologies. The SEC could provide clearer guidance on the potential role of newer technologies, providing managers with greater comfort that they won’t be ex-post penalized for trying to get their message out to more people. To be honest, we are less familiar with the approach taken by the Financial Services Authority in the UK or the regulatory authorities in other major markets, but we would encourage both regulators and exchanges around the world to help managers understand the potential of these tools.

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