User-Generated Content and Stock Performance: Does Online Chatter Matter?

Online chatter can strongly affect companies by boosting or slowing down sales of commented products, and user generated content even affects stock prices. An analysis of almost 350,000 consumer reviews and product ratings for 15 brands on popular websites showed some interesting effects: Having a higher volume of user comments, regardless of their assessment, was a strong indication of an increase in stock prices. The researchers also found negative reviews had a stronger impact than positive reviews. According to the results, negative chatter could erode about $1.4 million from the average market capitalization over the short term and $3.3 million over the 15 days after it appeared. To better estimate the dollar value of the findings, the researchers calculated possible profits for an initial investment of $100 million. They either sold or bought stock on a daily basis depending on the prevailing valence of the chatter from the previous day. The overall gains using this strategy yielded an average annual profit of $7.9 million over the four years in the sample. With this result, the researchers beat the Standard & Poor’s 500 index by 8 % by buying stock on positive chatter and short-selling it after negative chatter.