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Purpose – Social media have recently become an important strategic marketing tool to increase firm value. Based on an integrated theoretical framework, this study aims to examine the market reaction at the time of the creation of a Twitter platform for 312 firms from the Fortune 500 firms. Design/methodology/approach – To test the hypotheses related to the effect of social media platforms on firm value, the event history analysis (EHA) was used, also known as event study, usually designed to examine the impact of a historical phenomenon for the US Fortune 500 firms that developed a Twitter platform. Findings – A significant market reaction was found around the starting date of Twitter activities for the subsample of firms that are not contaminated by any other corporate announcements, but not for the overall sample. The market reaction is higher for firms with two-way interaction strategies rather than one-way messaging in both the uncontaminated subsample and the overall sample. It is higher in smaller firms, firms with losses and those with a family and/or a dominant shareholder. Further, firms in the contaminated subsample are likely to follow a two-way strategy after a positive revision of their earnings per share. We have run several robustness checks, including cross-validation on a holdout sample, and these findings remain consistent. Research limitations/implications – The integrated theoretical framework is another significant contribution. To our knowledge, this is the first study across disciplines that integrates the social exchange theory (SET), social representation theory (SRT), social network analysis (SNA), social identity theory (SIT), signaling theory (ST) and the impression management theory (IMT) into one framework that is built around information as a resource and social interaction. Practical implications – The results suggest that Twitter can be used to add value if firms interact and reciprocate with the various stakeholders. Social implications – Firms using social media must interact and reciprocate with the various stakeholders. Originality/value – This research is different than the published research on this topic in that it examines the impact on stock prices of the introduction of a specific social media platform, i.e. Twitter. The present results of the paper add to the prior research on database marketing and show that marketing “with” the customer is adding more value than marketing “to” the customer. The use of the net extends the scope of database marketing into a certain form of interaction marketing with “face-to-face” interaction within the relationships between the firm and its customers. Finally, the conditions under which social media platforms are used in an interactive manner are shown, and depicts that firms are more likely to use a two-way interactive strategy following a one-year period of positive momentum.
Limitations and directions for future research
In terms of limitations, the present paper refers to the EMH and considers that investors are able to predict the effect of the launching of a Twitter platform on future cash flows of the firm and firm value. However, the adoption of a new marketing strategy by a firm is more likely to affect its intangible assets, i.e. brand equity and customer loyalty, which might result in long-term value creation. Moreover, all investors are not experts in marketing developments and in social media strategies. As such, they may not perfectly and accurately evaluate the association between launching a social media platform and future cash flows (Srinivasan and Hanssens, 2009). Also, investors might be subject to hyping and as a result exhibit irrational behavior or exaggerated reaction in response to specific marketing developments (Sirri and Tufano, 1998). Thus, future work should examine the long-term association between social media activities and both operating and market performance.
Another interesting area of future research is the study of the effect on performance of strategic social interaction choices. Interactivity is a multi-faceted concept that goes beyond our definition of two-way communication to further include a high level of user engagement, and timeliness of communication (Liu and Shrum, 2002). A more detailed analysis of the content of posted comments, their frequency and timeliness would add to our understanding on the effect of interactivity on firm performance. Another area of research is to follow those firms that started with one-way messaging and that shifted to two-way communication, and study the causes and consequences of such a strategic change on firm performance.