Everyone Has an Opinion: The Informativeness of Social Media’s Response to Management Guidance

We examine whether the social media reaction to an important firm disclosure provides a signal of the quality of that disclosure and whether capital market participants’ reactions to the disclosure are consistent with the social media reaction. Specifically, we examine the sentiment of posts on StockTwits immediately following management forecasts issued between 2010 to 2017 and offer three main findings. First, we document that the relation between StockTwits sentiment and forecast news is stronger when the forecast is later revealed to be more accurate and less biased, suggesting that StockTwits provides an early signal of forecast quality. Second, we find a positive association between the extent to which social media sentiment agrees with the forecast news and stock price reaction to the management forecast. This suggests that when social media sentiment agrees with management forecast news, investors do too. Finally, we find a positive association between the extent to which social media sentiment agrees with the forecast news and subsequent analyst forecast revisions, particularly when forecast news is positive. This suggests that when social media sentiment agrees with positive management forecast news, analysts do too. Additional analysis suggests that investors appear to underreact to the signal provided by social media sentiment, while analysts appear to overreact to the signal. Overall, our results suggest that the social media reaction to management forecasts provides a timely and accurate reflection of not only the forecast’s quality, but also of how the forecast will be received by important capital market participants.