Risks and Rewards of Financial Disclosure on Twitter

In Brief

Twitter has become an important distribution channel, but using the social media platform presents unique challenges. The authors examine the current regulatory environment related to financial disclosure on Twitter, detailing the risks and rewards. They also discuss high-profile incidents that have involved disclosure on Twitter and provide advice for accountants, corporate officers, and board members on strategies to consider and pitfalls to avoid when sharing financial information and interacting with investors and other interested third parties on Twitter.

Companies have traditionally used various distribution channels to disclose information about their financial performance. Common channels include written documents, such as earnings press releases, and verbal statements, such as conference calls and shareholder meetings. One avenue that companies have not fully exploited is social media. There are numerous platforms available for corporate use, with Twitter, Facebook, YouTube, and LinkedIn being some of the most popular. Anyone with Internet access can create an account and participate on social media, which potentially gives companies a much larger audience than traditional disclosure channels. For example, shareholders are less likely to seek out press releases than they are to subscribe to a company’s Twitter feed; in fact, recent research has pointed to Twitter as a particularly important social media outlet for financial disclosure and additional dissemination of corporate information. This article provides a primer on financial reporting on Twitter, looking at the regulatory environment and weighing the risks and benefits of using Twitter for financial disclosure.

Background

Twitter launched in 2006, and the company saw an explosion of usage starting in 2007. At the end of the second quarter of 2018, Twitter averaged 335 million active users per month (“Second Quarter Selected Company Metrics and Financials,” Twitter, https://bit.ly/2HRYbmx), who since 2014 have been sending over 500 million tweets per day (“The 2014 #YearOnTwitter,” Twitter, Dec. 10, 2014, https://bit.ly/2y41wct). The first set of corporate Twitter accounts, including DirecTV, Whole Foods, IBM, Allstate, and Starbucks, were created in 2008, and companies of all sizes have been joining ever since.

A recent accounting study found that Twitter and Facebook are the social media platforms most frequently adopted by S&P 1500 companies, with Twitter adoptions surpassing the rate of Facebook adoptions in 2013 (Michael J. Jung, James P. Naughton, Ahmed Tahoun, and Clare Wang, “Do Firms Strategically Disseminate? Evidence from Corporate Use of Social Media,” Accounting Review, July 2018, https://bit.ly/2RtBuY7). Of these companies, nearly half had Twitter accounts, and barely half of those adopters used Twitter to communicate investor-focused financial information. It is likely that the number of companies adopting Twitter as a channel of communication with investors has risen in the last six years.

Even though the Jung et al. study suggests that not all S&P 1500 companies use Twitter to interact with investors (yet), investors themselves can use Twitter to find out more about the companies they invest in. A company does not need to have a Twitter presence to be the subject of discussion by investors on Twitter; third-party users can potentially have an impact on company stock price, particularly if less information about the company is publicly available, as with smaller companies or companies with less media attention.

The Regulatory Environment

Financial disclosure is and continues to be a highly regulated area for publicly traded companies, but the specific guidance related to corporate disclosure through social media is minimal, with the SEC offering limited guidance. In July 2012, Netflix CEO Reed Hastings posted a message on his personal Facebook account celebrating the company exceeding 1 billion hours of streaming content in a month for the first time ever. Netflix stock rose from $70.45 at the time the post was made to $81.72 by the close of trading that day. The SEC responded several months later by sending Hastings and Netflix a Wells notice that it planned to bring an enforcement action against them for violating Regulation Fair Disclosure (FD) by disclosing material information through an unofficial channel. Ultimately the SEC dropped the investigation into Hastings and Netflix, and instead used the incident to provide guidance on company social media usage under Regulation FD. The SEC clarified that companies can use social media sites like Twitter and Facebook to disseminate financial information to investors, as long as those companies have previously informed investors that the company’s financial news will be shared via social media channels. It also confirmed that Regulation FD applies to social media in the same way as the company website guidance issued in 2008 (“SEC Says Social Media OK for Company Announcements if Investors Are Alerted,” SEC press release, Apr. 2, 2013, https://bit.ly/2KBLha1).

For most companies, this is the only guidance the SEC has provided related to social media usage for financial disclosure. There has been other guidance not directly related to financial disclosure; for example, additional guidance has been issued by the Financial Industry Regulatory Authority (FINRA) and the SEC for registered investment advisers.

The SEC’s guidance on social media usage is fairly broad, and not all regulatory bodies share this view. For example, the Canadian Securities Administrators (CSA) advises against using social media for any disclosure of material information, and any material information that is disclosed through a site like Twitter should first be reported via press release. In addition, while the SEC does not formally define the term “quiet period,” during which there is to be limited communication with analysts and investors around the quarterly end date and earnings release so as not to violate Regulation FD, companies disclosing material financial information on Twitter need to ensure that their Twitter activity does not violate their own self-imposed quiet periods.

The Risks of Disclosure on Twitter

One of the main risks of disclosing any company information on Twitter is violating Regulation FD and spurring an SEC investigation. Social media has not been around long enough yet to observe all the ways that CEOs or CFOs can run afoul of the SEC, but there are still plenty of examples. The most recent high-profile incident is the case of Elon Musk and Tesla. Musk, then CEO and chairman of Tesla, tweeted in early August 2018, “Am considering taking Tesla private at $420. Funding secured.” This tweet was shared over 15,000 times and received over 87,000 likes; Tesla stock quickly rose by 11%, then quickly lost those gains in the days following the tweet (Bloomberg. “Tesla Stock Drops, Wiping Out Elon Musk’s Twitter-Fueled ‘Going Private’ Rally.” Fortune.com, Aug. 9, 2018. https://bit.ly/2ET1uXq). As a result, Musk was charged by the SEC with securities fraud for misleading investors and sued by multiple shareholders. Musk and Tesla had to pay separate fines of $20 million each, and Musk had to give up title of chairman of the company. The shareholders’ lawsuits are ongoing (“NASDAQ:TSLA Shareholder Notice: Lawsuit Against Directors of Tesla, Inc. in Connection with Tweets by Elon Musk.” SBWire.com, Feb. 28, 2019, https://bit.ly/2XvB1aF).

Aside from compliance-based risk, the speed at which information moves across Twitter can be another major risk (or potential benefit, as discussed below). In general, information spreads incredibly quickly across social networks, and bad news can go viral in minutes (Tommie Singleton, “What Every IT Auditor Should Know About Auditing Social Media”, ISACA Journal, 2012, https://bit.ly/2IDWkDE). In this environment, a company should consider strategic dissemination of financial information, and academic research shows that some companies are already following that strategy.

The Jung et al. study mentioned above examined whether S&P 1500 companies use Twitter to strategically disseminate financial information, what the factors for strategic dissemination are, and the effects of tweeting bad news. Strategic dissemination is different from strategic disclosure; companies that strategically disclose are choosing what to share in general, whereas companies that strategically disseminate are choosing what to distribute via a particular communication channel.

Jung et al. found that for the S&P 1500 companies using Twitter, earnings announcement tweets were the most common investor-focused tweet. Earnings are required to be disclosed in general, but are not required to be shared via Twitter. Using regression analysis, the authors found that companies were strategic in their dissemination of information through Twitter; companies in the study were less likely to share bad earnings news and more likely to share good earnings news. The level of strategic dissemination was found to be influenced by three factors: overall litigation risk, investor audience (sophisticated or unsophisticated), and social media audience size. Companies with high litigation risk, low levels of investor sophistication, and a large social media following were most likely to strategically disseminate news via Twitter.

A large audience, while potentially positive, also has the potential to quickly become negative. If a company tweets out negative news, that news can move at a lightning-fast pace. The authors found that when a company shared negative information, Twitter followers picked up the negative news and started retweeting it, and consequently more negative news articles then appeared in traditional media. Once the information is shared on Twitter, the company cannot control who else shares it. This creates the potential for bad news to be spread to a much larger audience than it may originally have reached. This is a potential downside to having a strong social media following, and a reason to consider the strategic dissemination of information.

The Benefits of Disclosure on Twitter

Given the potential pitfalls, it is reasonable to ask why companies should disclose on Twitter. Recent academic research suggests that a company’s Twitter presence (or lack thereof) and actions on the platform do have an impact on both company credibility and stock price. Prior studies have found that smaller companies with lower levels of press coverage tend to experience reduced stock liquidity, most likely due to company information being less accessible (Elizabeth Blankespoor, “Firm Communication and Investor Response: A Framework and Discussion Integrating Social Media,” Accounting, Organizations and Society, July 2018, https://bit.ly/2IEBhNz). Twitter could potentially help to solve this problem, as companies can use Twitter to disseminate their financial information to a large, diverse audience without having to go through traditional disclosure channels. A company tweet goes out to every user following a particular company on Twitter, whether or not that user is a current investor, thus reaching a more diverse audience than traditional channels. The ability of those users to then instantly share the information with their Twitter followers creates the potential for the original tweet to reach an even larger audience. This potential, along with the ability to track all stock-related conversations using a company’s “cash-tag,” makes Twitter much more dynamic than a traditional disclosure channel.

Twitter incorporated the use of cash-tags for searching company stock information in 2012. A cashtag is a dollar sign ($) followed by the company’s stock ticker symbol; for example, the cashtag for Starbucks is $SBUX. Searching for a publicly traded company’s cashtag on Twitter will show all tagged conversations related to that company’s stock. Such a search will not necessarily pull up all mentions of that company on Twitter, but it is still an efficient way for interested investors or company management to see what other Twitter users are saying about a particular company’s stock or other financial information.

A recent study found that company-initiated dissemination of financial information via Twitter is associated with more important information reaching investors, leading to increased stock liquidity, particularly for smaller companies (Elizabeth Blankespoor, Gregory S. Miller, and Hal D. White, “The Role of Dissemination in Market Liquidity: Evidence from Firms’ Use of Twitter,” Accounting Review, January 2014, https://bit.ly/2QxHnC5). The authors investigated whether the use of Twitter can solve, or at least mitigate, the problem of important information that is known to a company’s management but not to investors (information asymmetry), which is inherent in the traditional channels available for accounting disclosures. Using regression analysis, the authors found that dissemination of a press release link via Twitter, in addition to through traditional channels, is associated with smaller bid-ask spreads (i.e., less information asymmetry), specifically for smaller companies not receiving as much press coverage, as well as greater stock liquidity. Thus, it can be inferred that smaller companies can benefit from simply sharing their earnings information and other financial disclosures on Twitter.

As mentioned above, Twitter usage can also be harmful if the conversation slips out of the company’s control. A recent study found that company usage of Twitter can potentially mitigate the effect that bad news has on stock price (Lian Fen Lee, Amy P. Hutton, and Susan Shu, “The Role of Social Media in the Capital Market: Evidence from Consumer Product Recalls,” Journal of Accounting Research, May 2015, https://bit.ly/2pBxfgi). The authors found that companies with a corporate social media account (specifically, Twitter or Facebook) had a less negative stock price reaction after a product recall as compared to companies with no social media account. In additional analysis focused specifically on Twitter, Lee et al. found that while a corporate Twitter response to a product recall could lessen negative market reaction, having a corporate Twitter account did not help if the company lost control of the conversation. If many third-party users started tweeting and retweeting the product recall information, the companies saw progressively larger negative stock price reactions. Companies that tried to answer these tweets with care and attention, however, saw a much smaller negative stock price reaction. The takeaway from this study is that even in the face of bad news, managers can potentially use Twitter as a relationship-building tool to repair company reputation and somewhat protect stock price from the negative effects of a product recall. The findings of this study also have potential implications for financial disclosure, as the results could be used to infer how companies can use Twitter to manage the negative effects of bad earnings news on stock price.

Another study investigated investor reaction to a third-party criticism of a company on Twitter and management’s response to that criticism (Nicole L. Cade, “Corporate Social Media: How Two-way Disclosure Channels Influence Investors,” Accounting, Organizations and Society, July 2018, https://bit.ly/2QwUF1J). In the face of criticism on Twitter, managers can choose to not respond, to address the criticism, or to direct attention away from the criticism. In a behavioral experiment using 558 nonprofessional investors as subjects, Cade investigated how the number of criticism retweets and type of management response affected investors’ decisions to buy, sell, or hold company stock, as well as investors’ perception of changes in company value. The study had a third-party Twitter user question the validity of a company beating the analyst forecast in an earnings announcement. Cade found that investors gave greater weight to third-party criticisms when the criticism was retweeted many times. If a criticism was not retweeted many times, companies were able to ignore the tweet with minimal impact on company reputation. In the face of a criticism retweeted many times, the best course of action was for a company to address the criticism head on, with the second-best course of action being to redirect attention to a positive point in the disclosure. Investors did not respond well to companies ignoring a tweet that appeared valid (as determined by the number of retweets).

This study suggests that companies need to consider when and how to react to criticisms generated by third-party Twitter users. Everyone has an opinion, and anyone is free to share their opinion about a company’s financial disclosure information on Twitter. Companies should attend to criticisms that have been heavily retweeted, as these criticisms are more likely to appear valid to unsophisticated investors. They should also consider ignoring unretweeted criticisms, as a secondary finding in the study was that investors found unretweeted criticisms more valid if the company responded.

Finally, if companies are not currently using social media to interact with investors, those companies are sending out a message, whether they intend to or not. When a company is silent on Twitter, it is either ignored, or third-party Twitter users drive the conversation, for better or worse. The implication is clear: companies not participating in financial disclosure on Twitter are relinquishing the power Twitter can wield in investor relations.

Implications

There are certainly risks, both regulatory and otherwise, from disclosing financial information on Twitter. As academic research has shown, however, there is also the potential to improve stock liquidity, protect stock price from the effects of bad news, and build company credibility and reputation. The results from the studies discussed above suggest that Twitter can be a powerful tool for managing investor relations, but there are pitfalls that corporate officers, board members, internal auditors and other interested parties should be aware of.

There are also opportunities for internal auditors to help a company build a robust system of internal controls related to social media governance. There are multiple social media–related questions that internal auditors can help a company address. For example, in developing an internal social media governance policy, what does the company consider to be material information? In 2012, the CFO of Francesca’s Holding Corp. was fired for improperly sharing company information on Twitter during the quiet period (“SEC Clarifies Social Media Use and Reg FD Compliance,” Goodwinlaw.com, August 5, 2013, https://bit.ly/2EPfPUz). To prevent these types of incidents before they occur, internal auditors could help develop social media–related disclosure controls, including specific procedures and policies. While outside the scope of this article, such controls should consider how social media use affects brand/reputation, compliance risk, and information security risk (“The Digital Grapevine: Social Media and the Role of Internal Audit,” Deloitte.com, https://bit.ly/2Tue09R).

Direct lines of communication with investors open a company up to direct, potentially negative, questions on a public forum. The nature of the public forum can allow heated exchanges and emotionally charged information to become part of the conversation, which in turn can drown out the company’s original message. The best way to reap the benefits of Twitter while minimizing the risk is having strong and clear social media policies in place before the first corporate tweet is ever sent. Controls should be put in place and investor expectations need to be managed. Key questions a company needs to consider include the following:

• What will the company use Twitter for—simple dissemination of earnings announcements, or something more interactive?
• Who can use Twitter to share company information? Having a clear social media policy in place can prevent the unintentional sharing of material information.
• What is the level of sophistication of the Twitter audience? If investors are less sophisticated, they are more likely to be influenced by a company’s Twitter activity.
• How large a commitment is the company willing to make to Twitter communications? An active response strategy will require a significant commitment to monitor and respond to negative tweets.
• How much will management interact on Twitter? Even silence says something; if management usually responds to every tweet, then silence on a particular investor inquiry could send the wrong message.
• If management does interact on Twitter, what is the company approach to good news? To bad news?
• What will the company policy be for dealing with hostile Twitter users? Usually, when an interaction on Twitter becomes too hostile, one party can block the other party. If a company is using Twitter as a dissemination channel, however, this could be seen as a violation of Regulation FD if brought to the attention of the SEC.

Twitter is a low-cost, powerful tool in the hands of a management team that understands the inherent risks and rewards of the platform. Good words tweeted at the right time could net great rewards.