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Online chatter affects stock returns, USC study finds

Consumer reviews posted on popular websites can have an effect on a company's stock, according to USC research.

It turns out that those bad reviews of new computers, shoes, toys and other products at Amazon and various websites have more impact than just helping shoppers decide if they’ll buy the latest smartphone.

Poor reviews from consumers affect the stock price of the companies making those products, leading to negative returns of as much as 8 percent, which can become worse if the negative reviews aren’t addressed, according to Gerard J. Tellis, holder of the Jerry and Nancy Neely Chair in American Enterprise and professor of marketing, management and organization at the USC Marshall School of Business.

Tellis and former doctoral candidate Seshadri Tirunillai, now an assistant professor at the University of Houston, have published their research in the academic journal Marketing Science on how online chatter — or user-generated content — can predict stock market returns a few days ahead of time.

By buying stocks based on positive chatter and short-selling on negative chatter, the researchers beat the S&P 500 index by 8 percent in a hypothetical investment strategy.

“The chatter on the Web is not cheap talk, it’s valuable talk,” Tellis said.

Negative reviews affected stock prices and trading volume the most, the study found. Negative chatter could erode about $1.4 million from the average market capitalization in the short term and $3.3 million over the 15 days following the chatter.

The study looked at 15 brands across six markets from June 2005 to January 2010: personal computing, cellular phones, personal digital assistants or smartphones, footwear, toys and data storage. A total of 347,628 consumer reviews and product ratings from the most popular websites — Amazon.com, Epinions.com, and Yahoo Shopping — were studied.

Product reviews allow consumers to actively share their experiences, extending the typical word-of-mouth that helps sell things. In 2010, an estimated 95.3 million people wrote online chatter, which was read by 131.4 million.

Along with investment opportunities, the study’s results are important for product managers to gauge the performance of their brands and products through hourly and daily chatter that are available ahead of sales and earnings reports.

Action can be taken to combat negative chatter. A 1 percent increase in advertising expenditures increases chatter by .1 percent and decreases negative chatter by .19 percent, according to the study. New product announcements have a positive impact on chatter for digital products, such as cell phones and computers, but not as much for toys and footwear.

Whether it’s a faulty iPhone antenna or service problems at Dell, if a company’s first reaction is denial, it likely won’t help a stock price gain value.

“Denying is the bad way to go,” Tellis said. “Admission, apology and correcting it are the best way to go.”

One thing to remember: The voice of the masses is loud and clear online, especially in what they say about what the products they buy.

“If it was uninformed talk, it would not be leading the stock market,” Tellis said.

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