One of the major issues facing small listed or micro-cap stocks is that they tend to have low visibility with investors. The mainstream media is not particularly interested in reporting on them and small caps fall below the radar screens of most institutional investors. However, social media can help redress the balance and maybe even boost their valuations, according to research.
As such signs that a small cap company is adopting a long-term social media programme can be good news for its shareholders. North American small companies are ahead of their UK and European peers in this regard with Facebook and Twitter being the two most popular social media platforms for investor relations activities.
The price of invisibility
The problem of permanent low visibility is that it tends to translate into wider bid and offer spreads with the shares languishing at often deep discounts to net asset value. This makes the cost of capital more expensive when that company needs to issue new shares to raise finance and is also frustrating for shareholders. The Nobel laureate economist Robert C. Merton argued a quarter of a century ago in a paper - A simple model for market equilibrium with incomplete information that there is a rationale for listed companies to use public relations and advertising to reach target investors. He explained that: “An increase in the relative size of the firm’s investor base will reduce the firm’s cost of capital and increase the market value of the firm.”
Specialist metals information service Metal Pages said in a recent report that following through on Merton's advice small companies should be using social media to attract investors as it is also very cost effective. The report called junior mining companies should use social media early in the fund raising cycle goes as far as arguing that social media programmes should start preferably before the IPO even. Meanwhile, the University of Michigan conducted a study called Dissemination, Direct-Access Information Technology and Information Asymmetrywhich concluded that social media can raise investor awareness and understanding of small companies with a positive outcome for the liquidity of shares and their values.
Social media is in effect democratising the flow of information and real-time platforms such as Twitter allow the maximum number of people to receive news simultaneously and instantly. This is a very positive…