If you want to know which direction the stock price of a company rolling out a new product is headed, there’s no need to wait for sales figures. Just check out user-generated product reviews on the web. They’re as good an early warning system as any that share prices may be headed for trouble.
That’s the conclusion of a recent study about to be published in the academic journal Marketing Science. And its results have important implications not only for investors, but for marketers, too. The study, conducted by marketing professors Gerard Tellis of USC and the University of Houston’s Seshadri Tirunillai, involved the analysis of nearly 350,000 consumer product reviews on three major sites (Amazon.com, Epinions.com and Yahoo Shopping) between June 2005 and January 2010, as well as their affect on the share prices of 15 publicly traded firms involved in six businesses (personal computing, traditional cell phones, PDAs or smartphones, shoes, toys and data storage).
It was an impressively ambitious project, with lots of wonky relevance. For investors, though, the key finding is this: The more negative chatter there is in the first few days after a product is released, the more likely the underlying stock price will tank soon after. (The effect was detectable even after controlling for the influence of Wall Street forecasts, media mentions, advertising and PR.)
Positive reviews, on the other hand, proved unhelpful in predicting stock prices; their effect was neutral in either direction. The researchers suggest three reasons for the “asymmetric impact on returns.” First, negative information is harder to come by in these forums—positive reviews were four times more common than critical ones—so investors may find gripes more useful. Second, investors are almost certainly loss averse; humans in general tend to give more attention to risks than rewards. Finally, positive information may already have been absorbed into the stock price before the product actually came out, thanks to PR campaigns and other anticipatory buzz.
Some of this may sound like common sense — if people dislike a product enough to complain about it online, it’s not surprising that the company behind the product suffer a hit to its bottom line. But the findings are valuable nonetheless, in no small part because negative online review chatter tends to percolate a few days ahead of stock price movements. In any event, model portfolios set up by Tellis and Tirunillai—buying on positive chatter, selling on negative—outperformed the S&P 500 by as much as 8% on an annualized basis. Of course, the most likely beneficiaries of this data are institutional investors like mutual funds and Wall Street trading desks, which have the computing capabilities and manpower to do Big Data analysis of consumer product reviews on this scale. Individuals who try to anecdotally gauge consumer sentiment on such sites do so at their own risk. (Which won’t stop very many of those inclined from trying.)
Finally, in what comes across as something of a passing addition to their summary, Tellis and Tirunillai present one other interesting finding from their work, which could have broad implications for all sorts of business folk: “Offline television advertising,” the study authors write, “increases the volume of chatter while decreasing negative chatter.”
In other words, the hidden power of TV ads may not be that they increase the positive feeling—and subsequent buzz—about a product or service. Rather, the secret power of such ads may be their ability to diminish negative buzz. There’s a good deal of psychological research to suggest that, contrary to the adage, familiarity breeds fondness, not contempt. The more we’re exposed to a brand, product or service through interaction with TV advertising, the more we’re likely to consider it a “friend”—or at least not a foe. While such feelings may not make us rave about a disappointing product experience, they may very well make us less likely to rag about it.