A STUDY OF THE U.S. MARKET REACTION TO SEC’S CLARIFICATION ON THE USE OF SOCIAL MEDIA

Abstract

Studies have shown that investors gather information from firms’ disclosures and that the type of communication channel can make a significant difference. This paper examines the American stock market reaction to events leading up to the SEC’s decision to regulate (and allow) the use of social media for firm disclosures. By using an event methodology, I study the market reaction for firms that use Twitter extensively, and compare them to a set of control firms. I use measures such as size-adjusted cumulative abnormal returns (CAR), bid-ask spread, analyst forecast revision and dispersion as proxies for market reaction. My results show that firms that with an active Twitter presence suffered negative CARs after the trigger event, and after the final event when the SEC released its final guidance on social media disclosures.