In early November, as Elon Musk allowed anyone with eight bucks to buy a blue check mark, an account called @EliLillyandCo made a dramatic announcement. The pharmaceutical company was excited to declare that insulin was now free.
As one responder put it, that would be “big if true.” Eli Lilly is one of the three main suppliers of insulin, delivering the life-saving hormone to more than 8.4 million Americans. Although insulin can cost as little to make as ten dollars per vial, Eli Lilly charges over $80 for its non-brand generic version and almost $275 for its Humalog brand. A significant percentage of people are said to ration their insulin use to save money despite the serious risk to their health.
The effect on the company’s share price to its apparent generosity was immediate. The stock price fell more than four percent, wiping out more than $15 billion of value. The company’s real Twitter account @LillyPad, later issued a statement apologizing for the “misleading message” from the “fake Lilly account.”
The changes at Twitter, and in particular the confusion between old “verified” accounts, new Twitter Blue accounts, and the even newer “official” accounts have created plenty of opportunity for mischief makers to damage companies. But even without Elon Musk’s interference, social media has long been a place where unverified news moves markets.
In a recent paper, Chunying Wu of the College of Management and Economics at China’s Tianjin University summarized a set of positive effects that social media activities can have on a stock’s price discovery. The activities generally reduce information asymmetry, Wu and his colleagues argue, affect security pricing, and improve corporate governance.
By sharing information in a form that’s easily accessible to retail investors, the market is better able to match a company’s share price to its prospects.
But those positive effects aren’t guaranteed. The researchers described mainstream social media outlets such as Twitter and China’s Weibo as critical information channels, but they also warned that their “unmoderated information sharing has led to social media infamously dubbed a ‘rumor mill’ for diffusing false rumors and misinformation.”
The corporate benefits of information-sharing on social media only happen when the information released is official and true—and that doesn’t always happen.
“As online social media platforms have a low threshold, large numbers of users, and real-time information dissemination,” the researchers explain, “the promotion of social media activities on information spread could also have a bad influence and conversely hinder price discovery, especially when the information is proven to be false.”
Just as social media can spread news of high revenues, successful product launches, and valuable mergers so they can also spread rumors that a chief executive is about to leave, the workforce faces cuts, or that sales of a new product have turned out to be disappointing. Even when that bad news isn’t accurate.
Rumors Are Interesting But Expensive
The researchers defined rumors as “unconfirmed statements or interpretations of events/topics that the public is interested in.” They generally occur when the truth is uncertain and ambiguous, and they contain unverified information. Investors are prone to believing them and they propagate them as true.
The question though is what effect those rumors about companies have when they spread on social media.
To find out, the researchers collected samples of clarification announcements for all Chinese A-share listed firms between 2008 and 2020. Clarification announcements, like Eli Lilly’s apology for the misleading message about its insulin giveaway, are intended to set the record straight. They come from an official source instead of from the multitude of bloggers and influencers sharing random articles and social media posts and can be seen as true.
Because “rumors have been proven to affect stock prices and damage the company’s reputation and interests,” say the researchers, “listed companies attach great importance to rumor clarifications,
and most companies issue clarification announcements immediately after rumors and release the ‘official statement.’”
Each clarification announcement held information about the rumor it was dispelling, including the source of the rumor and when it circulated. The researchers coded the announcement to take into account the degree of detail and whether the rumors contained information that could be deemed positive, neutral or negative.
Altogether the data trawl netted some 2,523 rumor clarification announcements. Just 795 of the rumors clarified were positive and 347 were neutral. The researchers suggested that “the vast majority of rumors are negative.” It’s possible though that companies were content to let positive rumors circulate without issuing a clarification.
Having collected and coded the clarification announcements, the researchers then compared stock prices in the ten days following the dissemination of a rumor to the stock prices in the roughly 250 days that preceded the rumor.
What Goes Up Will Come Down
Unsurprisingly, what they found was that as a positive rumor grew, the stock price rose. And as a negative rumor spread, the stock price fell.
“That is, negative rumors lead to stock price declines, and positive rumors promote stock prices.”
The degree of rise and fall was also influenced by the amount of social media activity that took place in the days surrounding the clarification. The more the unfounded rumors spread across social media, the more volatile the stock became.
The good news is that these movements are only temporary. Posting activity spread highly discussed rumors and distorted investors’ immediate response but it also led to price reversal after clarification. Over the long term, the researchers argue, the influence of social media activities weaken. “Social media is a platform that provides timely information and discussion for users…. These users are easily attracted by new information arrival, and the influence for each event will not persist for a long time.”
In other words, what the researchers found was that rumors about companies spread frequently on social media platforms, and they tend to be negative. The rumors affect share prices and if they’re discussed frequently, they can affect share prices greatly. But a clarification can remove the volatility and correct the price distortion, which in any case wears off over time. At least until the next rumor surfaces.
The researchers didn’t investigate the source of the rumors but they do suggest that “there is significant information leakage before official rumor release for the whole sample and different rumor kinds.” They just don’t say where the information is leaking from, who’s letting it spill, or why.
Nor do they suggest a course of action for either executives or investors but the study does shine a light on the rise and fall of meme stocks. The rise of the value of Gamestop’s share price in early 2021 was fueled entirely by posts on social media by people looking to squeeze hedge funds and short sellers.
Buy recommendations started on Reddit’s WallStreetBets forum before spreading across TikTok, Twitter and Discord. But after reaching more than $500 in late January, the stock price is now around $20. According to the Wall Street Journal, the biggest winners from the Gamestop saga weren’t teenagers throwing their burger money at a rocketing memestock but the hedge funds who sold them the stock at inflated prices. Senvest Management cashed in, winning a profit of $700 million, says the Journal. Other winners included Morgan Stanley whose brokerage during the period enabled it to double its net profit in the first quarter of 2021 to $4.1 billion. Goldman Sachs made $6.8 billion during the period, its highest return on equity in twelve years.
As the researchers suggested, once the rumors have finished circulating, the price returns to its true value. And the people left holding giant bags of money when the price settles are the people who were holding big bags of money before the rumors started.
So there’s no investment advice in the researchers’ analysis rumors and stock movements. Instead, there’s a reminder of the importance of clear, accurate and fast corporate communications. If the more rumors spread, the more the price moves, and clarification quickly jams the rumor mill, companies need to be able to push out their clarifications quickly. Corporate social media teams should have their eyes on what people are saying about the company. They should be ready to communicate their findings to the communications department and that department should be able to push out a statement quickly for the social media team to share.
Social media should be a place where companies spread positive messages about themselves and improve their branding. It should be a place where they can communicate directly with customers, win feedback and measure sentiment. But it’s also a rumor mill over which they have little control. A clarification however can stop a rumor in its tracks and ensure that, despite Elon Musk’s trolling and Twitter interference, a company’s stock price isn’t moved too much by bad memes.
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