Linguistic Formality and Perceived Engagement - Investors' Reactions to Two Unique Characteristics of Social Media Disclosures

• In Event: The Role of Social Media and New Technology

Abstract

We examine whether linguistic formality in a firm’s disclosures on social media, as well as perceived engagement of social media users surrounding the disclosures, affect investors’ perceptions of managerial competence and willingness to invest in a firm. We focus on a case where a firm issues an earnings release and follows this release up with supplemental disclosures on social media. Holding constant the information content of the social media disclosures, we use a controlled experiment to manipulate the formality of the language used in the disclosures and the perceived engagement of social media users around each disclosure. Results of our experiment suggest that the use of informal language is advantageous for firms when it is accompanied by perceptions of high engagement among users of social media. Specifically, the combination of informal language and high engagement results in an increase in investors’ willingness to invest in a firm. This effect is mediated, at least in part, by increased assessments of management’s competence. Further, in a follow-up experiment, we investigate the precursors to engagement on social media and examine the impact of news type and communication style. Overall, our study advances our understanding of how firms can utilize social media to better connect with retail investors and shape investor judgments.

Authors

• Patrick Witz, Cornell University

• Kristina Rennekamp, Cornell University