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Business Education How Twitter can help institutional investors make better trading decisions

Despite concerns that social media can be used to mislead investors, a Rotman School of Management study analyzing nearly 900,000 tweets related to 3,000 firms suggests otherwise.

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The Globe’s bimonthly report on research from business schools.

Twitter’s reputation is somewhat tarnished these days because of the endless toxic interactions and highly unreliable claims from often nameless, faceless users online.

That may be true, but new research from the University of Toronto’s Rotman School of Management suggests that the popular social media platform is actually a useful tool when it comes to investment decisions.

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The diversity of opinion and independence of the platform’s “hive mind” make Twitter a good predictor of a firm’s quarterly earnings and returns, according to the study.

“Despite concerns about credibility, over a large sample, the wisdom of the crowds does hold,” lead author Partha Mohanram, professor of accounting and the John H. Watson Chair in Value Investing, says in an e-mail.

The study analyzed nearly 900,000 tweets related to 3,000 firms and posted between 2009 and 2012. The posts were from people expressing new or original opinions about a firm’s fundamentals and firms themselves passing on existing information.

Among its key findings, researchers found tweets in the days leading up to a firm’s quarterly earnings reports successfully predicted whether the firm would meet its targets. An analysis of the platform’s commentary also suggested Twitter does a good job at forecasting how the stock price would subsequently respond. The results were especially strong when there was little available information about a company (such as a small firm with limited marketing and communications capacity), and for tweets that relayed information specifically about a firm’s fundamentals and stock activity.

The findings underscore Twitter’s increasing importance as a go-to site among traders and business reporters to acquire timely and valuable information regarding the prospects of stocks.

And it’s changing how business gets done. In 2015, for instance, Boston-based hedge fund firm Tashtego set up a Social Equities Fund with investment decisions based on sentiment from social media. That same year, Dataminr, a startup that parses Twitter feeds to create alerts for traders, announced it had raised US$130-million in a private investment round.

The study’s results are equally important to regulators. Skeptics have argued that platforms such as Twitter need to be regulated to weed out individuals who exploit the platform by disseminating misleading and speculative information. But, the researchers write, “our findings suggest that the information from social media may help investors in their investment decisions, not mislead them.”

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Dr. Mohanram cautions that individual investors are not likely to be able to correctly replicate the conditions of the study to benefit from crowd-sourced opinion. “It requires a certain amount of data crunching ability and sophistication [to] analyze a large sample of tweets, categorize them and aggregate them all in real time,” he says.

Currently, this is possible only for institutional investors.

For small investors, “the best bet as always is buy simple index funds/ETFs [exchange-traded funds] and have a long horizon,” he says.

The study is published in The Accounting Review. It is co-authored by Eli Bartov of New York University and Lucile Faurel of Arizona State University.

Story ideas related to business school research in Canada can be sent to darahkristine@gmail.com

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