Master Thesis Finance THE CHANGING DYNAMICS OF CORPORATE MESSAGING – HOW CEOs’ TWITTER POSTS AFFECT THEIR COMPANIES’ STOCK PRICES? Patrycja Napora ANR: 194087/ SNR: 2024950 Msc Finance Supervisor: dr. K. Korhan Nazliben Tilburg, August 2019 Abstract This paper investigates the impact of CEOs’ Twitter posts on companies’ stock prices and focuses specifically on the difference in abnormal returns generated by particular tweet types. The number of companies using social media as a stream of corporate disclosure is steadily growing each year, with chief executives more active in publishing the essential corporate news via their official accounts. However, not enough research examining the influence of information presented on social media on stock prices has been done. Additionally, no previous study tested whether a stock market reaction is stronger for a particular type of news shared on executives’ accounts in social media. Therefore, using a sample of 247 tweets gathered from 15 public companies’ CEOs accounts, this study illustrates the shock on the market caused by CEOs’ tweets, showing the Average Abnormal Return of 0.55% generated during the first event day. Results present that posts illustrating executive’s personal views have a bigger influencing power than tweets sharing operating performance news or demonstrating CSR activity. Personality tweets on average generated 0.52% higher abnormal returns than posts sharing information about the company’s products. What is more, results illustrate that the influencing power of a CEO increases with the frequency of publishing tweets. The popularity of a tweet, measured by the number of likes and comments that the Twitter post received also strengthens the short-term price shock on the market. Table of Contents 1. Introduction ............................................................................................................................. 1 2. Literature review ..................................................................................................................... 4 2.1. Social media impact on financial markets ...................................................................... 4 2.2. Twitter and sentiment analysis ........................................................................................ 7 2.3. CEO’s personality and firm’s performance .................................................................... 9 2.4. The long-time debate about CSR .................................................................................... 9 2.5. Research importance and novelty ................................................................................. 10 3. Hypotheses formulation ........................................................................................................ 12 4. Data and methodology .......................................................................................................... 14 4.1. Dataset........................................................................................................................... 14 4.2. Event Study Methodology ............................................................................................ 17 4.2.1 Definition and construction of the model .............................................................. 17 4.2.2 Testing for significance ......................................................................................... 20 4.3. Multivariate regression model ...................................................................................... 21 4.3.1 Dependent variable – Abnormal Returns .............................................................. 22 4.3.2 Independent Variable – the type of tweet ............................................................. 22 4.3.3 Control variables ................................................................................................... 23 4.3.4 Model construction ............................................................................................... 24 4.3.5 Significance testing ............................................................................................... 26 5. Empirical findings and discussion ........................................................................................ 27 5.1. Event study findings ..................................................................................................... 27 5.2. Regression findings ....................................................................................................... 29 5.3. Discussion ..................................................................................................................... 33 5.4. Possible limitations ....................................................................................................... 35 6. Conclusion ............................................................................................................................ 35 References ..................................................................................................................................... 37 List of Tables Table 1. Descriptive statistics - Sample CEOs Twitter accounts. Data source: Twitter ............... 15 Table 2. Summary statistics for the data sample used in the study. .............................................. 16 Table 3. Percentage distribution of tweets in the sample by the group......................................... 26 Table 4. Daily Average Abnormal Return with corresponding significance values. .................... 27 Table 5. Test for Cumulative Average Abnormal Return using the t-statistic. ............................. 29 Table 6. Robust regression results. ............................................................................................... 31 Table 7. Average returns per tweet type. ...................................................................................... 32 Table 8. Kruskal-Wallis rank test for significance. ...................................................................... 32 Table 9. The pairwise comparisons of means with equal variances test. ...................................... 33 List of Figures Figure 1. Abnormal returns distribution by the tweet type ........................................................... 17 Figure 2. The event study.............................................................................................................. 19 Figure 3. Average abnormal returns by the event day. ................................................................. 28 1. Introduction In today’s modern world, social media has become an inseparable part of our lives, and the ability to share opinions and photos in real-time has changed the way we communicate. Increased Internet activity created broadcasting networks that facilitate the exchange of information containing a large amount of data. Companies made use of this increase in Internet popularity through gradually shifting the stream of corporate disclosure to social media. In the past, all company news was presented in the form of official statements or other types of regulated reports. However, with the growth of social media popularity, this form of corporate news communication has changed. Currently, social media is an essential stream of corporate news, shared through companies’ official accounts and webpages, as well as chief executives’ social profiles. This source of communication begun to play a central role not only in reducing asymmetric information between the company and investors but also in influencing and leading the emotional response to information (Chet et al., 2014). Data gathered via social media nowadays serves as a factor predicting future stock fluctuations (Bollet et al., 2011; Sul, 2014) and supports investors’ decision-making process (Nofer and Hinz, 2015). The most visible change that came with the shift of corporate disclosure was the freedom that companies gained in the context of type and timing of presented information. This freedom resulted in new possibilities but also threats created by that power to communicate with investors directly and to give them the ability to respond to presented news. Companies’ presence in social media proved to affect not only brand reputation but also the company’s future profits (Dijkmans et al., 2015; Deephouse, 2000). The growing popularity of social media led to an increased research interest in examining the effect of announcements made on Internet social platforms on stock prices. This stream of communication proved to be a useful predictor of future market movements (Cole et al., 2015) and currency pairs returns (Zhedulev, 2015). Not only can analysis of Twitter sentiment predict a single stock movement, but also the whole index future performance. A paper by Bollen, Mao & Zeng (2011) presents that measurements of collective mood states derived from Twitter are predictive of changes in the Dow Jones Industrial Average index over time. However, as presented in a paper by Ali (2018), a comprehensive understanding of the influence of social media on stock prices is still missing. Chief executives, as the main representatives of a company, should also take advantage of this new stream of communication. However, more than half of Fortune 500 CEOs are still not active on the Internet (CEO.com, 2016). Despite the limited social media presence, CEOs can reach a broad audience due to their popularity, which may increase their influential power (Sul et al., 2014). What is more, investors’ trust in the CEO