Market influencers yield temporary power - yet it wanes
In a groundbreaking study published in *European Financial Management*, researchers have found that posts by mega influencers can significantly impact a company's stock returns, with the influence lasting approximately three days following the post.
The study, which analysed over 16 million Instagram posts by influencers with at least 1 million followers, highlights that these large-scale influencer posts can influence investor behaviour and market perception, leading to measurable changes in stock prices during this short time window. The Bloomberg News Heat index, a tool used to measure institutional investors' attention, was found to be marginally influenced by the excess number of comments, relative to the average, on a post.
The research suggests that while mega influencer posts can generate immediate interest and trading activity, the effect diminishes as other market factors and news take precedence. This short duration reflects how quickly markets absorb such social media-driven information.
The study's authors argue that extreme sentiment posts may require monitoring and regulation, as they have the potential for abuse. This sentiment aligns with market observations in influencer marketing research, where mega influencers are known for having outsized, though often transient, impacts.
One notable instance of this impact was seen in 2022, when mega influencer Kim Kardashian paid a $1.26 million fine to the US Securities and Exchange Commission for advertising a crypto company’s tokens without disclosing that the post was sponsored.
In general, influencer posts about companies can drive stock trading volume and volatility, but do not tend to lead to abnormal stock returns. However, strongly-worded posts by mega influencers can affect a company's stock returns by 0.5% the next day, according to the study.
Companies should be cautious when collaborating with influencers, as they pose risks since influencers and their posts cannot be controlled. The researchers advise that while an influencer marketing strategy can bring substantial benefits, it also poses risks.
Informed traders, on the other hand, follow economic indicators, company financials, and market trends. Abnormal sentiment looks at the difference between the average sentiment score of an influencer's posts and that of their post about a specific company. Noise traders, who are more likely to make trading decisions based on emotions, market rumours, and social media posts, are more susceptible to the influence of mega influencers.
The researchers focused on two variables: abnormal sentiment and the number of comments that the posts attracted. They used data from Wikipedia Views to gauge how much attention retail investors paid to a particular post about a company.
In two recent IPOs, firms listed influencers as a stock market listing risk factor in their offering documents, acknowledging the potential impact of influencer endorsements on their stock prices.
While the study provides valuable insights into the short-term effects of mega influencer posts on stock markets, further research is needed to understand the long-term impacts and the role of various market participants in this dynamic.
- The study in European Financial Management suggests that mega influencer posts can cause a 0.5% change in a company's stock returns the day after a strongly-worded post.
- Mega influencer posts can drive stock trading volume and volatility, but do not usually lead to abnormal stock returns, according to the research.
- The Bloomberg News Heat index, which measures institutional investors' attention, was found to be marginally affected by the excess number of comments on a post.
- Companies need to be careful when collaborating with influencers as they pose risks, according to the study, since influencers and their posts cannot be controlled.
- Informed traders primarily focus on economic indicators, company financials, and market trends, while noise traders, who make decisions based on emotions, market rumours, and social media posts, are more susceptible to the influence of mega influencers.
