Online Chatter Affects Stock Returns

Released: 4/19/2012 2:00 PM EDT
Source Newsroom: University of Southern California
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Citations Marketing Science

USC Marshall study concludes that negative Web buzz can drive down stock prices

Newswise — It turns out that all of those bad reviews of new computers, shoes, toys and other products at Amazon and other websites with consumer reviews have more impact than just helping shoppers decide if they’ll buy the newest smartphone.

Bad reviews affect the stock price of the companies making those products, causing negative returns of as much as 8 percent, which could accumulate and spiral if the negative reviews aren’t addressed, said Gerard J. Tellis, the Jerry and Nancy Neely Chair in American Enterprise and a professor of marketing, management and organization at the USC Marshall School of Business. The risk of negative chatter peaks about four days after it is posted online.

Tellis and former doctoral candidate Seshadri Tirunillai (now an assistant professor at the University of Houston) are publishing their study in the academic journal Marketing Science on how online chatter -- or user-generated content -- can predict stock market returns a few days ahead of time.

They beat the S&P 500 index by 8 percent in a hypothetical investment strategy by buying stocks on positive chatter and short-selling them on negative chatter. The Internet may be a black hole of many opinions, but those opinions can matter when it comes to reviewing products.

“The chatter on the Web is not cheap talk, it’s valuable talk,” Tellis said in an interview.

Negative reviews affected stock prices and trading volume the most, the study found. Negative chatter could erode about $1.4 million from the average market capitalization in the short term and $3.3 million over the 15 days following the chatter.

Negative opinions may have more of an impact than positive opinions for several reasons, the study found, including that positive information may be suspect, negatives may have more informative content than positives and losses loom larger than gains.

The study looked at 15 brands across six markets from June 2005 to January 2010: personal computing, cellular phones, personal digital assistants or smartphones, footwear, toys and data storage. A total of 347,628 consumer reviews and product ratings from the most popular websites for such reviews -- Amazon.com, Epinions.com, and Yahoo Shopping -- were studied.

Instead of just passively seeking information online, product reviews allow consumers to actively share their experiences, extending the typical word-of-mouth that helps sell things. An estimated 95.3 million people wrote online chatter in 2010, and 131.4 million people read the reviews.

Along with the investing opportunities, the study’s results are important for product managers to gauge the performance of their brands and products through hourly and daily chatter, far ahead of infrequent sales and earnings reports.

Things can be done to combat negative chatter. A 1 percent increase in advertising expenditures increases chatter by .1 percent and decreases negative chatter by .19 percent, the study found. New product announcements have a positive impact on chatter on digital products such as cell phones and computers that online consumers are more responsive to, but not so much for toys and footwear.

Whether it’s a faulty iPhone antenna, service problems at Dell or a guitar being broken by United Airlines, if a company’s first reaction is denial, it likely won’t help a stock price gain value.

“Denying is the bad way to go,” Tellis said. “Admission, apology and correcting it are the best way to go.”

The voice of the masses is loud and clear online, especially in what they say about what they consume.

“If it was uninformed talk it would not be leading the stock market,” Tellis said.


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