Depending on local listing rules, every listed company must report profits every quarter or every six months. And every time they do, investors go through that age-old kabuki of trying to guess what earnings per share will be and then assessing whether the company exceeded or missed that expectation. It doesn’t matter that companies manage these expectations in the first place and then use all kinds of accounting tricks to beat them.
But what always amazes me is how uneven the market response to earnings swings is. Some companies (cough, cough, Tesla) can miss consensus estimates by a country mile and investors won’t care, while other companies might take a hit and see their stock prices barely move. This gives rise to a drift in the announcements after the earnings figures I’ve written about it in the past.
You might hypothesize that one of the influences on investor reaction to earnings results is investor sentiment, not just about the markets in general, but about the company itself. Kared Alsabah wanted to identify how this company-specific sentiment influences the stock price response to earnings surprises.
In total, he identified 3,200 Twitter accounts of American companies since 2015 and tracked how many company posts were liked, shared and commented on. Crucially, he limited his analysis to non-financial tweets (for example about a new discount offer, the company’s charity work or an image campaign).
Positive sentiment towards the company is clearly measured by tweets that receive more likes than tweets from competing companies. Negative sentiment usually manifests itself when Twitter users respond to a Tweet more often than they like or share it. Apparently this is called Ratioed (Ratio is the number of responses to a tweet divided by the sum of likes and shares).
The chart below shows the abnormal return of a company’s share price on the day of its earnings announcement. Note that this return is adjusted for the size of the earnings surprise. These bars therefore only show the deviation from a ‘rational’ market reaction to the earnings surprise. If a company receives more likes than other companies, its stock price holds up better on days when the company presents both positive and negative earnings news. In both cases there is no overreaction.
But if a company has recently become “ratio’d,” that is, has seen a lot of negative sentiment in its Twitter feed, its stock price tends to fall further on the day its earnings are announced. And this happens after both positive and negative surprises. Clearly, the messenger matters in how investors react to earnings surprises.
Abnormal returns in response to earnings surprises and Twitter sentiment
Source: Alsabah (2025)
#messenger #matters #business #edition