Investor Relations and
Stock Message Boards
Who is Chatting About Your Company on the Web?
BY PETER D. WYSOCKI, PH.D.
Assistant Professor of Accounting
UNIVERSITY OF MICHIGAN BUSINESS SCHOOL
The dramatic growth in the Internet has transformed the way investors receive
information about publicly traded companies. One recent innovation is the emergence of
stock message boards or chat rooms. Stock message boards are independent sites on the
World Wide Web where individuals discuss publicly traded companies by posting
messages that can be read by anyone visiting the site. Message boards are usually
anonymous forums where individuals are free to ask questions, relate factual information,
express opinions, or even start rumors about a company. Almost anyone can post a
message and its contents can quickly spread to thousands of potential investors. Popular
stock message board sites include Yahoo!, The Motley Fool, Silicon Investor, Raging
Bull, and Stock Talk. Message-posting activity on these sites has grown from trickle in
1997 to thousands of messages each day in recent months. Many companies now
diligently monitor these message boards and even participate in the discussions to “set
the record straight” or engage in damage control.
In spite of all this activity, little is known about stock message boards and their
potential impact on capital markets and investor relations. To shed some light on this
phenomenon, I have undertaken two recent research studies on stock messages boards
hosted on the popular Yahoo! website. The first paper addresses whether message-posting
activity is just pure noise or is related to company characteristics and stock market
activity. The second paper examines the attributes of individuals who post messages and
their potential motives.
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WHICH FIRMS ATTRACT MESSAGE POSTS?
My first research study examines the determinants of message-posting volume on
stock message boards (“Cheap Talk on the Web: The Determinants of Postings on Stock
Message Boards”, University of Michigan Business School Working Paper, November
1998). In this study, I identify candidate explanations for why individual investors would
post information on a stock message board. These explanations can be broadly classified
as: 1) meaningless random noise, 2) “herding” behavior by unsophisticated investors, 3)
investor disagreement due to inadequate information about a company from traditional
sources, and 3) investor disagreement due to uncertainty about a company’s prospects.
I used a custom Web-crawler (similar to an automated web browser) to gather
message data between 1997 and 1998 for over 3,000 public companies listed on Yahoo!
stock message boards. The total cumulative message count for each company was then
matched with company financial information for the same time period. An analysis was
then performed to determine what company characteristics are related to message-posting
activity. Table 1 summarizes the results of the analysis.
Table 1: Company characteristics and message-posting activity
COMPANY
CHARACTERISTIC
LOW MESSAGE-POSTING
VOLUME
HIGH MESSAGEPOSTING
VOLUME
Number of individual shareholders Small Large
Analyst following Low High
Market capitalization Small Large
Stock exchange NYSE NASDAQ/AMEX
Ratio of stock price to accounting
fundamentals
Low P/E
Low M/B*
High P/E
High M/B*
Company pays dividends? Yes No
Monthly share trading volume Low High
Accounting
Performance
Average profits or average
income growth
Extreme profits/losses or
high income growth
Share price volatility Low High
Typical industry Financial, Utilities Technology, Healthcare *M/B represents the ratio of price per share to book value of common equity per share.
Table 1 shows a distinct pattern in message-posting activity. The variation in posting
volume across companies is not just noise, but is related to companies’ fundamental
characteristics. Many of the results in Table 1 are consistent with the “unsophisticated
investor” hypothesis. Companies with a large number of investors (i.e. many small retail
investors) attract significantly more messages. It appears that unsophisticated investors
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are jumping on the message-board bandwagon to follow “hot stocks” that have high
prices relative to accounting fundamentals or have extreme financial performance.
On the other hand, Table 1 also shows that uncertainty about a company and its
information environment appear to drive message-posting activity. Growing companies
with uncertain prospects, risky characteristics, and high levels of information asymmetry
attract a greater number of message postings. These companies are often in the
technology and healthcare sectors, trade on the NASDAQ exchange, have highly variable
accounting performance, do not pay dividends, have volatile stock prices, and have
financial statements that are often difficult to analyze (these are exactly the companies
that attract a large analyst following). In summary, investor characteristics and a
company’s information environment are strong determinants of message-posting activity.
WHAT LEADS TO DAILY CHANGES IN MESSAGE POSTING ACTIVITY?
In “Cheap Talk on the Web”, I also study the relation between stock market activity
and daily changes in message-posting volume. I analyze the daily message-posting
activity of 100 companies on Yahoo! message boards during 1997 and 1998. My analysis
indicates that changes in daily message-posting activity are related to daily changes in
stock trading volume and daily stock price volatility of a company. Message-posting
activity also peaks on days surrounding a company’s public earnings announcements.
Finally, message-posting activity is shown to be a strong predictor of a company’s nextday
stock trading activity. A large increase in overnight message volume is typically
followed by higher than average next-day trading volume and stock price variability.
Clearly, there is a strong relation between the daily trading action in a company’s stock
and message board posting activity.
WHAT ARE THE CHARACTERISTICS OF MESSAGE POSTERS?
In a just completed research project, I dig deeper into stock message boards and study
the attributes of individuals who post messages (“Short Sellers and Message-Posting
Activity on the Web”, University of Michigan Business School Working Paper, October
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1999). In this study, I examine postings on Yahoo! message boards for companies listed
in the NASDAQ 100 Index between 1997 and 1999. A key finding of this study is that
the majority of messages are posted by a small number of individuals. The messageposting
concentration for five well-known companies is summarized in Table 2.
Table 2: The influence of a few individuals on Yahoo! message boards
Company Total # of different
individuals who post
messages (by alias)
% of all messages
posted by 5 most
active individuals
% of all messages
posted by 50 most
active individuals
Apple Computer 6,685 17% 50%
Intel 13,498 7% 22%
Oracle 9,730 8% 25%
Starbucks 2,216 13% 43%
MCI Worldcom 7,031 8% 27%
The examples in Table 2 are indicative of the pattern on most company message
boards. For virtually all companies, the majority of messages are posted by fewer than
5% of the individuals who have posted a message on the board. Based on these results, I
classify individuals who post messages into two groups: active posters and casual
posters. Active posters have very different posting habits compared to causal posters. For
example, while most messages are posted on message boards during regular stock
exchange trading hours, active posters usually post messages late at night after trading
hours. Active posters also exhibit short bursts of high posting activity followed by
extended dry spells of low posting activity.
Another interesting finding is that active posters tend to post in tandem and
enthusiastically reply to the messages of other active posters. This suggests possible
collusion among active posters or that a single active poster is posting under multiple
aliases. The habits of active posters raise questions about their motives for participating
in discussions on company message boards.
ARE SHORT-SELLERS LURKING ON YOUR COMPANY’S MESSAGE BOARD?
There have been numerous claims in the popular press that short sellers are active
participants on stock message boards. In my “Short Sellers” study, I investigate these
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claims by analyzing a group of NASDAQ companies that experienced large changes in
investors’ short-sale positions over a series of months. For each company, I classify each
calendar month as either a high or low short-sale month. The results of my analysis,
while still preliminary, indicate the following trends: First, message-posting activity on a
company’s message board jumps dramatically during high short-sale months. Second,
individuals who are otherwise infrequent message posters emerge as active posters during
high short-sale months. Finally, there is increased tandem posting by active posters
during high short-sale months. These combined results suggest that short sellers are
active participants on stock message boards and might be colluding to spread negative
information about a company.
CONCLUSIONS
My research has two important implications for investor relations professionals:
1) Keep Your Ear to the Ground. Message-posting activity is not just random noise,
but it linked to a company’s information environment. Therefore, you should view stock
message boards as a barometer of investors’ demands for information about your
company. A dramatic increase in postings about your company could be a sign of
investor discontent and signal the need to fill the information gap.
2) Know Thy Posters. Message posters are not a homogeneous group and a few
individuals usually dominate the activity on most stock message boards. The very nature
of message boards can allow this small group of individuals to disproportionately
influence “public opinion” about your company. Therefore, investor relations
professionals should be aware of the possible motives of these message posters. My
research shows that increased posting volume by certain types of message posters can
signal increased activity by short-sellers.
If you are interested in more information on these research studies or wish to view
statistics on message-posting activity for your company, you are welcome to visit
http://webuser.bus.umich.edu/wysockip.