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

Posted: 22 May 2015

See all articles by Lian Fen Lee

Lian Fen Lee

Boston College - Carroll School of Management

Amy P. Hutton

Boston College - Carroll School of Management

Susan Shu

Boston College - Carroll School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2015

Abstract

We examine how corporate social media affects the capital market consequences of firms’ disclosure in the context of consumer product recalls. Product recalls constitute a “product crisis” exposing the firm to reputational damage, 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 announcements, 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 confirms that the moderating effect of social media varies with the level of firm involvement and with the amount of control exerted by other users: the negative 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.

Keywords: social media, disclosure, product recalls, Twitter

JEL Classification: G14, M15, M40, M41

Suggested Citation

Lee, Lian Fen and Hutton, Amy P. and Shu, Susan, The Role of Social Media in the Capital Market: Evidence from Consumer Product Recalls (May 1, 2015). Journal of Accounting Research, Vol. 53, No. 2, 2015. Available at SSRN: https://ssrn.com/abstract=2608547

Lian Fen Lee (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Amy P. Hutton

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617 552 1951 (Phone)

Susan Shu

Boston College - Carroll School of Management ( email )

Boston College
140 Commonwealth Ave.
Chestnut Hill, MA 02167
United States
617-552-1759 (Phone)

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