How Twitter Levels Playing Field for Small Companies to Win Investors

Good news for venture capitalists and entrepreneurs who are known to kvetch that that their companies fall below the radar screen of Wall Street analysts and the media.

It’s widely known that mainstream media coverage seems to favor large companies over small ones.

It’s a valid concern. (Disclosure: Every weekday, this portal’s Business Video Page features frequently updated reports about investing and Wall Street. But there are relatively few video reports on small cap stocks.)

You see, news organizations pay much more attention to high-visibility companies because they attract bigger audiences.

But an academic study shows that Twitter can help such small cap companies gain market liquidity.

Entitled “Dissemination, Direct-Access Information Technology and Information Asymmetry,” it was authored by Elizabeth Blankespoor at Stanford University, and Gregory S. Miller and Hal D. White at the University of Michigan.

They suspected that Twitter and other technologies were changing the old rules, according to a press release. For the first time, companies could communicate with investors directly and instantly.

Ironic findings

As a practical matter, corporate investor-relations departments are pouring money into Twitter and other “push” technologies without completely knowing how well they work.

On a more theoretical level, the findings further undermine a key assumption about how markets work.

The traditional assumption has been that markets instantly assimilate every new scrap of information as soon as it becomes public. If a company announces its latest earnings over the PR Newswire, for example, the traditional view is that the information reaches everybody in the market immediately.

Many analysts had already found that the real world was messier than that. In the real world, investors get much of their information from the news media – the Wall Street Journal, news services such as Bloomberg, and television networks such as Fox Business and CNBC.

Twitter as a favorite tool

Twitter is hardly the only direct-access technology in use. Many companies also reach investors through mass email alerts, RSS feeds, and Facebook. But for many investor-relations departments, Twitter has become the social networking tool of choice.

To measure Twitter’s impact, the researchers studied one particular form of corporate tweet: those that contain links to a company’s full original announcement.

The researchers compiled tweet data from 2007 through September 2009 for 102 information technology companies (on the theory that IT firms were likely to be early Twitter adopters). They then correlated the tweet activity with trading data about the liquidity of each company’s stock.

Specifically, they looked at the spread between bid and ask prices, or the difference between prices offered by buyers and sellers. Narrow spreads mean that a stock is more liquid and easier to trade, often because investors are more confident about what they know.

High-visibility companies with lots of shareholders usually have narrower spreads than lesser-known companies, an indicator of the “information asymmetry” that plagues the lesser-known companies.

Detective work

The researchers had to identify the twitter “handles” for each of the companies, round up all their tweets, and then weed out those that didn’t link back to press releases and other blog posts.

They also tabulated how many times people actually clicked on the tweet’s hyperlink. Once they had all that, they correlated the tweets with trading data immediately before and after each news announcement.

For the record, the average company in the study had 28,318 followers over the period (Twitter was still in its infancy). Companies sent an average of 46.9 tweets with links per month, and each link was clicked an average of 141 times.

Bid-ask spreads

What the researchers found was that bid-ask spreads narrowed significantly for lesser-known companies when they tweeted about their news. Bigger companies that already enjoyed visibility didn’t see any impact.

In other words, tweeting helped level the information playing field at least a bit.

The study’s authors also looked at whether Twitter had a particular effect on smaller investors, who don’t have as much money for information collection as institutional traders. In theory, Twitter might boost their activity.

But the data doesn’t show that. Tweeting didn’t seem to have any meaningful impact on the share of trading in small lots.


The big takeaway, says researcher Blankespoor, is that Twitter and other “direct access information technologies” can help reduce the information disadvantage of small companies. It isn’t just the message that’s important. It’s how widely you can disseminate it.

Agreed, however, note when marketing financial information, there are reasons to be careful in choosing a medium.

From the Coach’s Corner, here are PR tips:

A market analyst is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today. 


Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.

Seattle business consultant Terry Corbell provides high-performance management services and strategies.