The Role of Social Media in the Capital Market: Evidence from Consumer Product Recalls

• Published date: 01 May 2015
• Author: SUSAN SHU,AMY P. HUTTON,LIAN FEN LEE
• Date: 01 May 2015
• DOI: http://doi.org/10.1111/1475-679X.12074

DOI: 10.1111/1475-679X.12074

Journal of Accounting Research

Vol. 53 No. 2 May 2015

Printed in U.S.A.

The Role of Social Media in the

Capital Market: Evidence from

Consumer Product Recalls

LIAN FEN LEE,

∗AMY P. HUTTON,

∗AND SUSAN SHU

∗

Received 6 January 2014; accepted 19 January 2015

ABSTRACT

We examine how corporate social media affects the capital market conse-

quences of firms’ disclosure in the context of consumer product recalls. Prod-

uct recalls constitute a “product crisis” exposing the firm to reputational dam-

age, loss of future sales, and legal liability. During such a crisis it is crucial for

the firm to quickly and directly communicate its intended message to a wide

network of stakeholders, which, in turn, renders corporate social media a

potentially useful channel of disclosure. While we document that corporate

social media, on average, attenuates the negative price reaction to recall an-

nouncements, the attenuation benefits of corporate social media vary with

the level of control the firm has over its social media content. In particular,

with the arrival of Facebook and Twitter, firms relinquished complete control

over their social media content, and the attenuation benefits of corporate

social media, while still significant, lessened. Detailed Twitter analysis con-

firms that the moderating effect of social media varies with the level of firm

∗Carroll School of Management, Boston College.

Accepted by Philip Berger. We are grateful to the editor and an anonymous referee for

their helpful comments and suggestions. We thank workshop participants at the 2014 Jour-

nal of Accounting Research conference, 2014 AAA Annual meeting, Boston College, Boston

University, Stanford University,and University of Illinois – Chicago accounting research con-

ference and Beth Blankespoor, Jerry Kane, Paul Ma, Sam Ramsbotham, Sugata Roychowd-

hury, and Nemit Shroff for useful comments and suggestions. We also thank Andrew Bronzo,

John DeLorenzo, Mollie Dillon, Daniel Kim, Sungwon Kim, Xiaohui Luo, and Jiada Tu, for

their excellent research assistance. An online appendix to this paper can be downloaded at

http://research.chicagobooth.edu/arc/journal-of-accounting-research/online-supplements.

367

Copyright C, University of Chicago on behalf of the Accounting Research Center,2015

368 L.F.LEE,A.P.HUTTON,AND S.SHU

involvement and with the amount of control exerted by other users: the neg-

ative price reaction to a recall is attenuated by the frequency of tweets by the

firm, while exacerbated by the frequency of tweets by other users.

JEL codes: G14; M15; M40; M41

Keywords: social media; disclosure; product recalls; Twitter

1. Introduction

In the past decade, information technology has changed the disclosure

landscape and the way firms communicate important information to stake-

holders. Both regulators and companies are starting to embrace social me-

dia as a viable disclosure channel for important information. In April 2013,

the SEC announced that companies may use social media outlets to an-

nounce key information in compliance with Regulation Fair Disclosure.1

Despite the increasing attention from regulators and companies, there is

limited evidence on the consequences of corporate use of social media and

even less on the differential impact of various social media platforms.2In

this study, we attempt to shed light on these issues.

Compared to traditional disclosure channels, social media allows a firm

to directly and quickly reach a large network of stakeholders with its in-

tended message. To illustrate, followers of a firm’s social media account(s)

get instant notifications of corporate news; they can share the news imme-

diately with their friends and followers, cascading into widespread reach

of the firm’s intended message. Through the use of corporate social me-

dia, the firm can bypasses information intermediaries and disseminate its

intended message, unfiltered by traditional media, to a large network of

users. In addition, social media outlets such as Facebook and Twitter facil-

itate multi-directional interactions that allow users to have an online “con-

versation” with the firm and with other users, which changes the dynamics

and nature of the corporate disclosure.3

With an interest in exploring the power of social media in the context

of corporate disclosure, we focus on product recalls under the 1972 Con-

sumer Product Safety Act (CPSA). A product recall constitutes a “crisis”

in the firm’s product market. As is the case with most corporate crises,

1See http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171513574. Net-

flix announced soon after the SEC announcement that it may use social media channels such

as Twitter, Facebook, and its own corporate blogs as outlets for disclosing material information

(Bensinger [2013]).

2A noteworthy exception is Blankespoor, Miller, and White [2014], who document that

tech firms using Twitter to disseminate links to firm-initiated press releases experience lower

information asymmetry.

3Sophisticated investors have caught on to the wealth of information on social media. Anec-

dotal evidence suggests that hedge funds are beginning to track and dissect social media con-

tent to gain insights into investor and consumer sentiment, aided by social media aggregator

services such as Gnip (see Light [2012] and Conway [2012]).

THE ROLE OF SOCIAL MEDIA IN THE CAPITAL MARKET 369

the primary goal of a recalling firm is to contain the harm and limit and

repair damage to the firm’s reputation. Social media is likely to be a use-

ful disclosure channel within the crisis context. As previously mentioned, a

firm’s social media platform (hereafter referred to as corporate social me-

dia) facilitates quick, direct broadcasting of the firm’s intended message

to a broad base of stakeholders. Timely disclosure of the recall to a large

network of users is an effective way to contain the damage. It gets more

consumers to stop using the potentially hazardous product sooner, thereby

reducing the number of incidents, which in turn minimizes the negative

publicity surrounding the recall as well as the associated legal liability.

In addition, firms can use their social media posts to augment the disclo-

sure content provided in the official Consumer Product Safety Commission

(CPSC) recall announcements with additional clarifications, reassurances,

and planned course of actions. A product recall increases uncertainty about

the firm and its products, and leads to a greater demand for information

from customers and investors alike. Social media use enables the firm to

quickly fill the information vacuum with its own message, before misinfor-

mation, rumors, and speculation intensify the crisis. Through consistent

and continual communication, the firm can demonstrate its competence

in handling the crisis and show concern and empathy for those affected by

the product hazard, thereby lessening stakeholders’ negative perceptions

of the firm in the wake of the recall. This ultimately helps the firm regain

credibility and repair its reputation.

While corporate social media is likely to be useful in managing a prod-

uct crisis, there is one potentially important downside to its use: the bad

news is spread to a wider audience. This can be detrimental to a firm’s

reputation and its future sales as more consumers learn about the prob-

lems with the firm’s product. In the end, it is an empirical question

whether corporate social media provides net benefits during a product

recall.

Using a sample of 405 consumer product recalls between 2000 and 2012,

we examine whether corporate social media affects the market reaction to

product recall announcements.4We focus on the market reaction because

it is an overall measure of the costs of a recall (Jarrell and Peltzman [1985],

Barber and Darrough [1996], Davidson and Worrell [1992]). Not surpris-

ingly, prior research documents a significant, negative market reaction to

consumer product recalls (Pruitt and Peterson [1986], Chen, Ganesan, and

Liu [2009]). Our evidence demonstrates that recalling firms with any of the

four social media platforms we examine (corporate blogs, Rich Site Sum-

mary [RSS], Facebook, and Twitter) experience a less pronounced negative

4The CPSA defines “consumer products” broadly,but excludes products regulated by other

federal agencies, e.g., automobiles and related equipment (NHTSA); food, drugs, medical de-

vices, cosmetics (FDA); firearms (ATF); airplanes (FAA); boats (Coast Guard); and pesticides

(EPA).