Bloggers as Financial AnalystsBy
Corporate announcements, analyst forecasts, and the news media have long been the traditional methods for disseminating information about publicly traded companies. In today’s digital world, however, consumers have taken personal control of many services that were previously relegated to expert service providers, and financial blogs have become a growing source for current news and information, stock analysis, and investment recommendations.
Now established as part of the new media, blogs represent a key component of a firm’s information environment. This phenomenon makes it more difficult for firms to control information about their own organization. Management needs to be aware of and understand this new outlet. Who are the participants in these investment information forums, and where are these blogs located? What’s the impact of social media investment blogging on investors, firms, and capital markets?
Understanding the growing trend of social media investment information is critical from both an individual investment and a firm management perspective. Firms can benefit from gaining an understanding of how financial blogs relate to stock performance and how to monitor and manage their corporate images using these platforms. Several studies provide insight into the answers of these questions, and our own research on a sample of financial blog posts identifies some of the characteristics shared by popular financial bloggers.
THE IMPACT OF BLOGS
Thousands of financial blogs exist on the Internet, written by a variety of individuals ranging in expertise from the unsophisticated investor to the professional financial analyst. Many have catchy names such as “Good Financial Cents,” “Investor Junkie,” and “Retire by 40.” And some are even managed by commercial enterprises, such as Charles Schwab or e-Trade.
With social media forums now seen as a viable media source, several research and academic studies have examined the impact that social media—and financial blogs in particular—can have.
One major characteristic is the extent of their reach. According to a 2012 study from Blogher.com, approximately 81% of U.S. online consumers rely on blogs. And NielsenSocial.com reports that around 6.7 million Internet users are bloggers, while another 12 million write blogs using their social media. Technorati, a blog search engine indexing more than 100 million blogs, found in their 2013 Digital Media Influence Survey that blogs are ranked among the top five most trustworthy sources of information on the Internet.
NM Incite, a Nielsen/McKinsey company, has tracked worldwide blog usage over several years and found that blog usage has grown from 36 million in 2006 to more than 181 million in 2011 (http://bit.ly/1UQxbBR). People are increasingly clicking to acquire pertinent information for their investment decisions.
Part and parcel with the size of the audience are the conversations that are occurring on these platforms. Blog exposure is a firm’s visibility on blogs or the extent to which a company’s products or services are discussed in the “blogosphere.” According to Nan Hu, Yi Dong, Ling Liu, and Lee J. Yao, blog exposure typically isn’t related to stock performance unless it’s reinforced with traditional news sources—regardless of whether it precedes or lags the narrative in traditional media coverage. In their article, “Not All That Glitters Is Gold: The Effect of Attention and Blogs on Investors’ Investing Behaviors,” published in the January 2013 Journal of Accounting, Auditing & Finance, they found that stocks that are frequently discussed on private blog spaces tend to earn lower returns than those discussed less frequently, and returns are lowest for frequently discussed stocks with low institutional ownership. Furthermore, blog exposure seems to be associated with a variety of investing factors, such as investor sophistication and cost of capital, and investors and companies should pay attention.
An article in the December 2013 issue of Journal of Communications by Gregory D. Saxton and Ashley E. Anker, “The Aggregate Effects of Decentralized Knowledge Production: Financial Bloggers and Information Asymmetries in the Stock Market,” observes that information about S&P 500 firms that’s disseminated via financial blogs appears to be leveling the playing field between traditional investors and corporate insiders. When the profitability of corporate insiders—such as firm executives, board members, and large shareholders—was evaluated relative to the amount of information provided about the firm on the top 150 financial blogs (based on readership, influence, and authority), the advantage of insiders was significantly diminished. The increased discussion on blogs reduced the imbalance of information between insiders and outsiders, also known as information asymmetry. Financial blogs may serve as an inexpensive replacement for insider trading regulation and aid in improving market efficiency because blogs can aid in balancing the information availability to outsiders.
Blogger articles and reader comments both helped to predict stock returns and earnings surprises, according to “Wisdom of Crowds: The Value of Stock Opinions Transmitted through Social Media,” an article published in the May 2014 issue of Review of Financial Studies. The authors, Hailiang Chen, Prabuddha De, Yu Hu, and Byoung-Hyoun Hwang, developed a computer program to scan through all the articles published between 2005 and 2010 on SeekingAlpha.com, an “online platform for investment research” covering more than 4,000 small to mid-cap stocks. According to the website, “Seeking Alpha articles frequently move stocks, due to a large and influential readership which includes money managers, business leaders, journalists and other bloggers.” Even the name “Seeking Alpha” (SA) refers to the pursuit of excess returns beyond a benchmark portfolio, such as the S&P 500, where “Alpha” is the profit component ideally provided by a portfolio manager or, in this case, the SA platform.
After controlling for the effects of media and analysts, the researchers found that the blogs predicted stock returns and earnings surprises. This suggests that the information provided to investors through financial blogs is valuable.
The research into the effect that financial blogs have on stock prices finds that, in some cases, the information on financial blogs appears to be associated with stock performance. Corporate management may find it useful to gain an understanding of how stock performance is related to certain aspects of financial blogs. According to “Do Financial Blogs Serve an Infomediary Role in Capital Markets,” published in the May 2016 issue of American Journal of Business, author Laura K. Rickett found that returns were associated with blog posts on SeekingAlpha.com during unstable economic periods and for buy recommendations when information asymmetry is high. This relationship was stronger for firms with low institutional ownership, which represents the level of unsophisticated (or retail) investors. The study indicates that “everyday” investors may rely on blogs for their investing decisions particularly during times of uncertainty.
Veljko Fotak analyzed 500 buy and sell stock recommendations on SA in “The Impact of Blog Recommendations on Security Prices and Trading Volumes,” a September 15, 2007, University of Buffalo working paper. He found that the market reacts more strongly to short recommendations and to blog postings that target liquid stocks issued by large firms. Fotak also tested the characteristics of bloggers, such as education, credentials, affiliation, and anonymity, and found higher abnormal returns for recommendations by bloggers who held a graduate degree. No other blogger characteristics were associated with a greater stock return. So, while it may be possible to earn a profit by following the advice of bloggers, investors may have difficulty choosing which bloggers are providing profitable advice. With the number of bloggers out there, however, there likely will be investors who profit from their advice.
WHAT MAKES A BLOGGER POPULAR?
Identifying the most influential bloggers may not be easy. (See “A Vast Universe” at end of article.) Firms that wish to actively manage and monitor the blogosphere may be interested in the characteristics related to blogger popularity.
To research the potential blogger characteristics associated with popularity, we examined a sample of blogs hosted on SeekingAlpha.com. There are more than 10,000 contributing bloggers at SA, from complete amateurs to more advanced professional financial advisors and analysts, as well as more than 280,000 commenting participants and four million registered users. The content of the blogs is screened for quality of writing as well as the frequency of postings and level of readership. To publish on the SA site, a blogger must reveal his or her expertise and current stock holdings, and those disclosures are made available to users.
Registered SA users can choose to follow specific bloggers, whether it’s because of the blogger’s reputation, advice and analyses, or an interest in a particular stock the blogger owns. Some SA bloggers have several thousand followers. The number of followers a blogger achieves and the number of comments an article generates are tracked publicly as an indicator of popularity. SA users can also comment on the articles posted by bloggers.
We collected a sample of blog posts that appeared on the SA website during a bear period (September 2008 to November 2008) and a bull period (March 2009 to May 2009) to examine the activity on blog posts during two radically different economic periods. In all, we gathered 593 articles from 125 different bloggers.
We wanted to see whether bloggers with greater expertise, such as relevant experience, a college degree, or certifications like the certified financial analyst (CFA), have larger followings. Thus, we looked for connections between the number of followers and a blogger’s expertise as well as associations between stock performance and the blogger’s advice.
We found that bloggers in our sample who had higher expertise also had more followers on average. We then analyzed their recommendations or forecasts of stock performance and tracked the results on the day of and day after the post. (We chose a two-day window because typically a blog article would be read on the day it was posted or the day after.) The results show that the information in blog posts from experienced bloggers or from those with a large following aren’t associated with an abnormal return during the two-day window.
In terms of popularity, bloggers have significantly more followers when the companies they post about had higher than normal stock returns and trading volume. And popularity, at least in terms of the number of followers, is on average lower during times of economic uncertainty, such as a bearish market. Conventional thinking might assume that investors would be more inclined to seek out investment advice, such as from financial blogs, when the economy is uncertain, but our sample of blog posts shows the opposite.
There’s also a significant association between the number of followers a blogger accumulated and the number of recommendations the blogger made. Put simply, the more recommendations a blogger made about investment decisions, the more followers he or she had.
SOCIAL MEDIA AS A COMPETITIVE ADVANTAGE
Given the visibility and influence of financial blogs, firms may want to consider monitoring these social media platforms and balance that information with their own information releases. Companies can identify blogs that cover their firm’s stock on a regular basis and determine if they need to follow up with news announcements to address or counter—either directly or indirectly—the information discussed in the blog posts so that the message aligns with the firm’s positions on the matter.
Not only can firms influence the information about their company that’s shared in the social media environment, but they also can gain a competitive advantage. Firms should take a proactive role in the dissemination and monitoring of their information on social media. A 2013 study by Nora Ganim Barnes, Ava M. Lescault, and Stephanie Write found that the majority of Fortune 500 firms use Twitter, YouTube, and Facebook, and 34% of firms were using blogs to communicate with investors. Elizabeth Blankespoor and Gregory S. Miller, in their January 2014 article, “The Role of Dissemination in Market Liquidity: Evidence from Firms’ Use of Twitter,” in The Accounting Review, discovered that firms with less traditional media visibility can increase their liquidity ratio (the trading volume of the stock associated with a unit change in the price of their stock) by using Twitter. Firms should consider using social media to interact with investors, and those that ignore this information platform may be at a disadvantage in the investment realm.
Social media presents both opportunities and challenges for companies. The Securities & Exchange Commission (SEC) provided guidance in 2008 and 2013 to address how firms can use these social media platforms as a venue for public disclosure while remaining in compliance with Regulation Fair Disclosure (FD). The SEC recommends that all the firm information outlets, such as websites, SEC filings, and news releases, identify the various firm social media sources to ensure they are used regularly as a supplement to traditional disclosures.
Firms should carefully assign responsibility for social media management to ensure compliance with Regulation FD. They should also design social media policies that include the same controls used for other financial disclosures. The SEC also cautions against using executives’ personal social media platforms, such as a CFO’s Twitter account or Facebook page, due to compliance issues with Regulation FD, but it recognizes that corporate social media sites are a channel of investor information (U.S. Securities & Exchange Commission 2013, Release No. 69279).
As studies have shown, information posted on some of these blogs appears to be valuable to investors and may affect stock performance. Firm executives should monitor and, to the extent possible, manage investment advice posted about their firm by financial bloggers. This includes monitoring some of the large financial blogs to discover what is being communicated specifically about the organization and releasing responses or additional information as it relates to significant blog posts.
Firms also should be aware of how their company is viewed on these social media platforms. Facebook, YouTube, Twitter, LinkedIn, and Internet blogs can be used to manage the overall corporate image and to balance the messages on financial blogs in order to ensure that investors have an accurate picture of firm performance.
It isn’t always clear which bloggers have the strongest influence on the market, but overall bloggers appear to make an impact. While bloggers with more expertise appear to have a larger investor following, their advice doesn’t appear to translate into significant abnormal returns in our sample of bull and bear market periods. Yet other studies of longer periods find a positive relationship between blogger recommendations and stock returns. We interpret this to mean that, while in aggregate, data shows a connection between blogger advice and returns, the profits may be limited to specific periods. There doesn’t appear to be a winning strategy of beating the market by systematically following blogger advice, but the aggregate profitability of blogger recommendations indicates that this social media platform will persist.
As part of the “new normal” in the investor information environment, social media and financial blogs slightly reduce the gap in market efficiency. Financial blogs exhibit growing participation, and there’s evidence that investors are paying attention. While financial blogs represent a challenge for firms, adapting to the new information environment can create a competitive advantage and lead to greater communication control and improved corporate transparency.
A VAST UNIVERSE
When beginning efforts to monitor what is being said about a firm on social media platforms, the sheer scope can be overwhelming. A simple Google search for “stock advice” or tips results in more than 250 million hits. Here are some examples of the sites available. It is by no means comprehensive, and inclusion on the list doesn’t indicate an endorsement of the site.
Benzinga.com is a financial media outlet that combines real-time news with actionable trading ideas. Its goal is to give investors access to all the information that’s available. The site also offers various tools, including financial market and data APIs, such as a real-time newsfeed, a financial calendar suite, data, and white-labeled newsletters.
GuruFocus.com “tracks the stock picks and portfolio changes of the best investors in the world.” Its philosophy is based on following the actions of notable investors, such as Warren Buffett, to make fewer investment mistakes. Users can select which “gurus” to follow, and information is taken from the investors’ SEC filings.
LinkedIn.com is a business-oriented social networking platform. Companies and individual professionals can create their own profiles and connect to others on the site. The site contains a publishing platform that allows users to create and post their own stories or items to share with their network and/or the general public. Many corporations use the site as a way to disseminate their business information and interact with followers.
MorningStar.com provides independent investment research on approximately 525,000 investment offerings, including “stocks, mutual funds, and similar vehicles, along with real-time global market data on nearly 18 million equities, indexes, futures, options, and more.”
SeekingAlpha.com is a blog platform focused on investment research. The bloggers are investors and industry experts, and they must disclose their experience as well as stock holdings before they can contribute. Registered users can also post comments reacting to blog posts, creating even more discussion.
StockTwits.com is a financial communications platform for the financial and investing community that bills itself as “the leading social network for investors and traders.” Analysts, media, investors, and even the public companies themselves contribute to the stream. Its platform also integrates with Twitter, Facebook, and LinkedIn.