Wisdom of Crowds: Is Nonfinancial Information Disseminated on Twitter Informative About Future Fundamentals?

Abstract

This paper examines whether third-party-generated nonfinancial information on Twitter, once aggregated at the firm level, is predictive of upcoming firm-level fundamentals, and if so, what factors determine the cross-sectional variation in the predictive power. First, this study finds that the predictive power of nonfinancial information on Twitter is greater for firms whose major customers are consumers than for firms whose major customers are businesses. Second, the predictive power of the volume and valence of Twitter comments about products and brands with respect to firm-level fundamentals varies with the level of advertising. However, professionals in the capital markets, such as analysts, do not fully incorporate the implications for upcoming sales of the collective wisdom on Twitter. Analysts do not revise their forecasts of sales in response to the change in Twitter information, and thus, the consensus forecast error is systematically biased conditional on nonfinancial information disseminated on Twitter.