Does Chatter Really Matter?


Let’s say you are planning to buy a new HP laptop. You have spent quite some time comparing laptops online and you have found that the HP Pavilion 17-f240nd perfectly matches your needs. The reviews that you have read seemed truthful and you have a feeling that you will be satisfied with your new laptop. You are glad to know how other consumers experience the HP Pavilion and what they all use it for. The internet with its online product reviews and ratings have made your life so much easier! After you have used your new HP you might even contribute a review, as you want others to know how you feel about the product. Even when you are dissatisfied with it, you might write a review as you want to prevent others from buying it. Clearly, product reviews can help consumers in making decisions and thus affect firm sales. However, are these product reviews also related to other important performance metrics of the firm?

Tirunillai and Tellis (2012) studied the relationship between user-generated content (UGC) and stock market performance of the firm. They examined product reviews and ratings (chatter) because these are rich in product-related information. Consumers frequently post videos or blogs about certain products, however these often contain too much information which is not always relevant to a specific product. Tirunillai and Tellis (2012) argued that the signal-to-noise ratio is too low in these types of UGC and is therefore not taken into consideration in their research. Various markets were taken into account over a period of four years (from June 2005 to January 2010). These markets range from personal computer and data storage, to toys and footwear. Among other, consumer reviews for HP, SanDisk, Mattel, and Nike were examined.

To start with, they found that most of the online chatter was positive. This result was found across all markets with an average of 75% of chatter being positive. Moreover, the volume of both positive and negative chatter showed an upward trend. This is beneficial for firms and investors, because the other findings show that the volume UGC predicts abnormal returns and increases in trading volume on the short-term as well as on the long-term. However, negative chatter has a significant negative effect on returns, whereas positive UGC has no significant effect on returns. Offline television advertising can be used to increase to volume of chatter and decrease negative chatter at the same time.  Lastly, negative consumer chatter increases idiosyncratic risk, which is asset specific risk that is not correlated to market risk. Logically, firms should keep this risk at a minimum in order to not discourage investors.

The previous results are important for investors and managers. Investors that experience information asymmetry should turn to UGC in order to find more information about the firm’s performance. UGC often includes information that is not (yet) widely known and more importantly, when UGC includes a lot of negative chatter, investors should now know they should not invest in this particular firm. For managers it is important that they trace the negative chatter and take corrective action as soon as possible, in order to prevent losses in shareholder value. For instance, to counter negative chatter about a product, the firm can start broadcasting television ads. Based on the study and our own experience, we can conclude that consumer chatter is not only informative for other consumers, but also for firms and investors.

Effects of consumer chatter on stock price

Source:

Tirunillai, S., & Tellis, G. J. (2012). Does chatter really matter? Dynamics of user-generated content and stock performance. Marketing Science, 31(2), 198-215.

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