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

TLDR

Product recalls expose firms to reputational damage, sales loss, and legal liability, making rapid stakeholder communication essential and positioning corporate social media as a potentially useful disclosure channel. This study investigates how corporate social media influences the capital market impact of firms’ recall disclosures. Corporate social media generally dampens the negative stock price reaction to recalls, but the attenuation diminishes when firms lose control over content, with firm‑tweet frequency mitigating and other‑user tweet frequency exacerbating the effect.

Abstract

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.