Back Asset management companies use social media to persuade investors, according to a study

Asset management companies use social media to persuade investors, according to a study

A study by Javier Gil-Bazo, a professor of finance at UPF and BSE, concludes that a mutual fund attracts more money from investors if the company that manages it has recently published tweets with a positive tone.

17.11.2022

Imatge inicial

The growing popularity of social media has raised concerns about their potential to misinform the public and manipulate individuals’ opinions and behaviour. They are an ideal persuasive tool for asset management companies as they allows them to communicate with current and prospective investors without the strict restrictions imposed by mandatory information disclosures on the timing, content, and framing of information.

However, it is unclear whether asset management companies can succeed in their efforts to persuade investors, as there is already plenty of objective information available in the mutual fund market through the mandatory disclosures provided for by law in this area. In addition, in social media, users are not passive recipients of messages from companies, but can respond to them publicly and contest their content.

“Consistently with the persuasion hypothesis, positive tweets work best when they convey advice or views on the market and when investor sentiment is higher”

Javier Gil-Bazo, a professor of finance at UPF’s Department of Economics and Business and at the Barcelona School of Economics (BSE), together with Juan F. Imbet, a professor at the Université Paris-Dauphine (PSL) and a PhD in  Economics, Finance and Management from UPF are the authors of an article that focuses on the mutual fund market, which analyses whether the companies that manage them use social networks to attract money from investors

The study, published in BSE Working Papers, combines a database of nearly 1.6 million Twitter posts by US mutual fund families between January 2009 and December 2020 with textual analysis. The authors find that a mutual fund attracts more money from investors if the company that manages it has posted tweets with a more positive tone during the previous month: the additional money flows are both statistically and economically significant. “Consistently with the persuasion hypothesis, positive tweets work best when they convey advice or views on the market and when investor sentiment is higher”, they assure.

Although in their analysis the authors control for a variety of fund flow determinants, they cannot rule out that tweets respond to unobservable news that, in turn, predict fund flows, they clarify. Thus, and to identify the effect of asset management firms’ tweets on investor decisions, the researchers combine a high-frequency approach with intraday Exchange-Traded Fund (ETF) trading data: “We find that the price of an ETF experiences a temporary increase immediately when the fund’s management company posts a tweet with a positive tone”, they assert.

However, the authors reject the alternative hypothesis that asset management companies use social media to alleviate information asymmetries by either lowering search costs or disclosing privately observed information.

The researchers are convinced that their study may have important implications for the allocational efficiency of the mutual fund market

The researchers are convinced that their study may have important implications for the allocational efficiency of the mutual fund market: “While social media can be used to reduce informational frictions and improve the allocational efficiency of the mutual fund market, our results suggest that asset management companies use social media to persuade investors, which may, instead, lead to a worse matching between capital and managerial skill”, they conclude.

Reference article: Javier Gil-Bazo, Juan F. Imbet (October 2022) “Tweeting for Money: Social Media and Mutual Fund Flows”, BSE Working Papers, no. 1366

 

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