While the millions of voices on Twitter can feel chaotic at times, could collective opinion be harnessed to provide insight on equity investments?
A new study by the University of Toronto’s Rotman School of Management believes so. Its researchers found that the aggregate opinion of numerous individual tweets before a company’s earnings report can successfully predict the subsequent earnings and returns.
“The dramatic increase in the use of social media these past few years had a significant impact on the capital market,” stated the report. “Firms use social media to communicate with their investor base and, increasingly, individual investors use social media to share information and insights about stocks.”
Using a broad sample of data from between 2009 and 2012, this prediction held true for both tweets containing new information or tweets reporting on information that had been previously released. The results were even more correlated where tweets spoke directly to company fundamentals and stock trading. Notably, the results held true even if traditional media sources were making similar statements about companies than the ones appearing on Twitter, with the correlation even stronger when there was less information circulating about a company.
This article originally appeared on CIR’s companion site, Benefitscanada.com. Read the full story here.