Twitter, 'Media Failure' & SME Liquidity: Research Indicates News Tweeting Can Help Reduce Bid-Ask Spreads

Tuesday, Aug 31 2010 by
Twitter Media Failure  SME Liquidity Research Indicates News Tweeting Can Help Reduce BidAsk Spreads

It's long been an observation of many smallcap investors that the mainstream media generally struggles to cover the sheer volume of smaller company news stories in any depth (or, often, at all!) 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 very interested to hear of the latest research paper coming out of the University of Michigan entitled “The Impact of Managerial Dissemination of Firm Disclosure” which analysed the impact of Twitter as an investor communication channel.

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. What is fascinating about this latest research is that it found, in particular, that greater "tweeting" by smaller firms during news event windows is positively correlated with lower bid-ask spreads, after controlling for other factors. This suggests that emerging new Web channels like Twitter could play a role in addressing the underlying information asymmetry which is, in our view at least, at the root of the smallcap liquidity problem.

To find out more about this exciting research, we spoke earlier today 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…

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6 Comments on this News show/hide all

emptyend 31st Aug '10 1 of 6

Proof, IMO, that Tweeting is for twits.

The REAL gap in communication for smallcap firms is, in fact, the lack of proper in-depth research into the fundamentals of those companies. This is something that sites like Stockopedia can address by providing an excellent and efficient platform on which users can share their considered thoughts.

Relative to the provision of such high-quality platforms, tweeting merely adds noise.

There is a terrible danger in confusing VOLUME of information ....and associated narrow spreads....with QUALITY of information (and debate)....and associated better decisions!!!

Narrow spreads are IN NO SENSE a substitute for better investment decisions!

I despair at the idea that having more stupid people shouting ever more loudly is in some sense better than having an intelligent and informed exchange of views.

Sometimes less is MOST DEFINITELY more!!!   *

*Apologies for "shouting"


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Fangorn 31st Aug '10 2 of 6

Spot on EE.

I prefer to call it "twatter" however as it seems the twits that predominantly use it are also complete twats!

But then that's just me - old fashioned and uninterested in what so called celebs are having for breakie, or what they plan to do in an hour.

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Edward Croft 31st Aug '10 3 of 6

It's a silly name granted, but personally I use Twitter as a 'social RSS feed'. i.e. it's not the value of the 140 character tweets that's important, it's the value of the content that those tweets are linking to - the tweets branch out to lots of the best content on the web. It's also totally consumable from a mobile phone, which is a huge help to those on the move.

Most of the top broadsheet journalists in the country now use Twitter ahead of any other news dissemination as it shows the social importance of a story. Journalists have suffered under email inbox press release spam for a generation, and finally they have a social blade to cut through it. They become cliques of tweeters who follow each other and break stories within their circles. On that note, it has a lot of value.

To be frank, tweeting hasn't really caught on amongst UK investors, but I guess in a generation it all may change... I hope though, by then it will have a slightly more appropriate name.

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nigelpm 31st Aug '10 4 of 6

Funny really. I always thought I was at the forefront of technology but I just don't "get" twitter!

Even Facebook is starting to irritate me now.

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emptyend 1st Sep '10 5 of 6

In reply to post #47036

Hi Ed,

To be frank, tweeting hasn't really caught on amongst UK investors, but I guess in a generation it all may change... I hope though, by then it will have a slightly more appropriate name

As I see it, Twitter is mostly used by people in the meedya, many of whom have a vastly-exaggerated view of their own importance and relevance. Richard Bacon, Stephen Fry and countless other cases refer.

Of course it can be a rather useful pathway for those involved in viral marketing of their products or services....and, as with YouTube, it is a handy self-promotion device for those with a "cause" or a funny idea. For example, the "cat-in-bin" woman and her mockers......and for those behind the enormously-successful "Compare the Meerkat" advertising campaign.

But I don't see it as having much relevance to investment, other than as a roadsign pointing to places where more relevant and interesting content can be found.

It is difficult for those who are still in their 20s and 30s to remember a time before we had Google, YouTube, Twitter and Clouds......but you have only to go back a mere 12 years and NONE of this was much more than a twinkle in their inventors' eyes. In those days Altavista and Yahoo were the main search brands, mobile phones were used for calls, and emailing was something one did from the privacy of one's spare bedroom.......

.......I think it far too early to assume that much of this (other than Google) will necessarily remain permanent features of the online landscape - least of all Twitter, which has "FAD" written all over it IMO. Of course previous fads, such as frisbees, hula hoops and Cabbage Patch Kids all lasted for a while - but eventually they petered out as the market got saturated and some other "new thing" came along. Once the meedya luvvies, the footballers, celeb-watchers and Kevin Pietersen tire of using Twitter, then no doubt it will be replaced by something else.....

.......but in the meantime I don't think there is much in it for those who are investors of any level of seriousness.



ps......I may be dead in a generation - so you may yet be right!  ;-)

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Mining Maven 1st Sep '10 6 of 6

I very much agree with Ed regarding Twitter. I also think the name is probably the worst thing about it. It actually invites ridicule from the off. Add to that the inane celebrity usage in popular culture which now overshadows its lesser known but much more valuable attributes.
As we can see, the stigma of Twitter has actually alienated people who now mentally switch off as soon as the word is mentioned.
For those not yet immersed it is not surprising that you can’t even imagine yourselves engaging with it. Yet without first-hand personal experience of its countless applications, it’s extremely hard to really appreciate the benefits (though to be fair, Ed quote an excellent real world example).
Suffice to say, understanding Twitter and what it does, currently takes some application or experience. But I don’t see it is a fad. It is simply too useful for too many people. It cuts away a massive layer of email and all but eliminates spam! And it is revolutionising mass market communications & driving down costs associated therewith.
You just have to look beyond the media hype.
Its uses will no doubt evolve and new ones will be found, and you never know, maybe a new name for what it actually does will emerge…

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About Dave Brickell

Dave Brickell

Dave is one of the co-founders of Stockopedia.  Over the last twenty years, hedge funds and the financial institutions at the heart of the City have become increasingly dominated by quantitative analysis, high quality data and computing power. They have learned to invest in ever more optimal ways designed to prey on the weaker hands in the market. Unfortunately, the resources available to individual investors have just not kept pace. We believe strongly in the power of quantitative models & analysis to improve investor decision-making and don't see why their benefits should only be enjoyed by those wealthy enough to invest in hedge funds.  more »

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