Is Buzz Good For Business?
Media mentions and firm performance
Do companies that get a lot of media attention perform better, or worse, than companies that don’t? What about social media?
As an investor, should you consider “buzziness” a positive or negative indicator? As a business strategy, how valuable is it to seek out media attention?
It’s tough to answer these questions empirically, but let’s look at some statistics as proxy metrics.
One study from 20161 looked at New York Times coverage of US publicly-traded firms from 1921 to 2016, and found higher stock returns in the top-quintile of media visibility compared to the bottom quintile. Even after controlling for factors such as firm size and book-to-market ratio, firms with more news mentions got significantly higher returns — 2.75% higher per year.
A portfolio that was long the top quintile and short the bottom quintile in firm-size-adjusted NYT coverage level would outperform the market significantly over the long run:
The size of the media effect on stock prices is almost exactly the same as the size of the momentum effect (stock prices that have risen recently tend to keep rising for a while.)
It’s not just stock price; more media mentions are also associated with significantly higher sales growth and profitability growth. A one standard deviation increase in media coverage levels is associated with an 0.49% increase in operating profitability growth. High-media-coverage firms also have higher growth in future total assets, capital expenditures, and number of employees.
The paper authors hypothesize two mechanisms for why this might be: a.) media mentions might increase sales growth by serving as a form of advertising; b.) media scrutiny might put pressure on firms to improve corporate governance
Another obvious hypothesis is simply that better firms tend to get more media coverage.
Interestingly, this paper finds no change on the size of the investment premium based on whether coverage was positive or negative.
Another paper on 1445 Chinese firms between 2013-2018 and 20 leading online Chinese media publications found that media coverage volume and positive valence were both positively associated with return on assets, at a 1% significance level.2
Fortune 500 firms in the top quintile for media coverage of the CEO, between 1992 and 2002, outperformed bottom-quintile CEO-visibility firms by 8% a year in stock returns.3
Social media attention seems to be associated with stock price growth and sales growth as well.
In a sample of 2194 publicly-traded US firms from 2006-2017, increases in Twitter engagement metrics (likes, replies, retweets) from the firm’s primary account were all significantly associated with increases in stock prices and sales in the subsequent month.4
There’s some evidence that in the short term, more news coverage is predictive of lower earnings and stock returns.
Between 2000 and 2015, using a dataset of articles in four major US newspapers covering a total of 9870 publicly-traded firms, the number of articles about a firm in a quarter were significantly negatively associated with return on assets in that quarter.5 The authors’ model is that news articles about businesses are more often negative than positive, and they are reporting “bad news” about the firm which is reflected in lower earnings in the short term.
This doesn’t contradict the hypothesis of a positive “media effect” in the long term — it could be that having a higher long-term average level of coverage is a positive sign about a firm’s overall performance, while in the short term, news attention is a negative predictor for the firm’s near-future earnings.
Overall, it looks like media attention is a (modest) positive signal about a business’s long-term prospects, both in terms of stock price and accounting fundamentals.
Does the data on publicly-traded companies tell us anything about private companies? It’s anyone’s guess, but some of the rationales translate. Media coverage can still attract customers to a private business; it’s still possible that more-successful private companies get more media attention. (The corporate-governance explanation seems less likely to be applicable to private companies since their governance structures are so much less publicly visible.)
From an investment perspective, this suggests that the “bias” towards paying more attention to companies that you’ve already heard of via media, isn’t actually that much of a bias; companies that are in the spotlight more tend to have better growth prospects.
From a business strategy perspective, it’s still unclear whether the evidence suggests that seeking media attention is valuable; media attention could be either a cause or an effect of good fundamentals.
Hillert, Alexander, and Michael Ungeheuer. "Ninety years of media coverage and the cross-section of stock returns." University of Mannheim, working paper (2016).
Qin, Haiqing, et al. "The Impact of Online Media Coverage on Corporate Performance." 2020 The 11th International Conference on E-business, Management and Economics. 2020.
Nguyen, Bang Dang. "Is more news good news? Media coverage of CEOs, firm value, and rent extraction." Quarterly Journal of Finance 5.04 (2015): 1550020.
Singh, Atul Kumar. Is Firms’ Social Media Engagement Informative about Firm Performance?. Diss. The George Washington University, 2020.
Niessner, Marina, and Eric C. So. "Bad news bearers: The negative tilt of the financial press." Available at SSRN 3219831 (2018).