To talk or not?: An analysis of firm‐initiated social media communication's impact on firm value preservation during a massive disruption across multiple firms and industries

Abstract

We examine the role of firm‐initiated social media communication using Twitter in mitigating the negative impact of large‐scale disruptions, such as the Covid‐19 pandemic, on the shareholder value of firms. We develop our hypotheses using signaling theory and test them using data collected from Twitter and Bloomberg®. Our data set consists of 121,988 firm‐generated tweets from 467 S&P 500 firms collected in March 2020 at the time of the lockdown announcement in the United States. We find that frequent and relevant communication reduces latency and increases the observability of messages, preserving a firm's shareholder value. We also find that a positive outlook and extent of interest from stakeholders results in preserving shareholder value. On average, firms lost about 1.08% of their market value per day (about 9.72% during the 9‐day period around the lockdown announcement). Our study contributes to the extant literature in three ways: (1) adds to the literature on disruptions–shareholder value by considering large‐scale disruptions such as the Covid‐19 pandemic, (2) highlights informational and communication elements of risk management strategy, and (3) adds to the growing body of literature on Twitter by considering firm‐generated tweets. The results of our study are of importance to managers as well. For instance, firms tweeted about 57 times per week, and each additional tweet could preserve about $5.85 million of a firm's market valuation, on average. Also, it is not enough that the firms took appropriate actions during a large‐scale disruption; they also need to communicate their actions and its implications to their stakeholders effectively. These results can help managers devise their Twitter communication strategy during large‐scale disruptions.

Effects of supply chain disruptions due to COVID-19 on shareholder value

“…The pandemic has created an environment of noisiness due to myriads of signals from firms, policymakers, central bankers, world leaders, etc. Some firms have used tweets as signals to communicate distinguishing positive actions to investors (Srinivasan et al, 2022). While Srinivasan et al (2022) explored how firms may use tweets to distinguish positive actions in a noisy signaling environment, our context is unintended negative signals arising from SCDs caused by the pandemic.…”

“…, 2022). More importantly, except for Srinivasan et al. (2022) that is still limited in scope to the US market only, no prior studies examine the financial impact of pandemic-induced SCDs in the context of supply chains.…”

“…The pandemic has created an environment of noisiness due to myriads of signals from firms, policymakers, central bankers, world leaders, etc. Some firms have used tweets as signals to communicate distinguishing positive actions to investors (Srinivasan et al. , 2022).…”

“…Environmental distortion occurs when the medium for propagating signals reduces the signal observability. For supply chain events, medium can be press releases, shareholder meetings, annual reports, newspapers or even social media (Srinivasan et al. , 2022).…”

“…, 2022). While Srinivasan et al. (2022) explored how firms may use tweets to distinguish positive actions in a noisy signaling environment, our context is unintended negative signals arising from SCDs caused by the pandemic.…”