Social media posts about potential mergers and acquisitions (M&As) can significantly predict the likelihood of M&A success, say HKUST researcher Charles Hsu and colleagues. Social media message boards give China’s 50 million small investors a voice, which they are using to express their opinions on acquisition activity. This study establishes an influential relationship between social media message boards and M&A decisions, highlighting the role of social media in corporate governance.

“Mergers and acquisitions constitute an important yet controversial firm activity,” the researchers tell us. Although acquiring another company can put a firm on the path to rapid growth, shareholders in acquiring firms may suffer significant wealth loss, especially due to managers’ hubris or empire-building ambitions. “When managers engage in value-destroying activities,” warn the researchers, “small investors have traditionally been especially vulnerable.”

However, Internet stock messaging boards are resetting the scales, “making it possible for tens of thousands of small investors to aggregate their information and express their opposition to an acquisition proposal in a timely manner at almost zero marginal cost,” according to the researchers. “Timely and value-relevant information is critical for small investors to make the right investment decisions and protect their own interests,” the researchers explain.

Stock message boards are the perfect channel for such information exchange, as they attract large numbers of users from diverse backgrounds. “These features of the stock message board thus allow users to tap into the wisdom of crowds,” say the researchers, “where the aggregation of opinions provided by many (non-expert) individuals may convey useful information that professionals do not possess about the prospects of an acquisition proposal.”

Today, say the authors, “51 percent of small shareholders use stock message boards as their main channels to share stock investment information.” Some of these users have “unique knowledge of the various connections and networks among individuals” involved in M&As.

To explore whether small investors’ stock messages can predict the success of M&As, the authors reviewed over 14,000 social media posts related to 303 mergers. They found that the information in social media posts had an unique predictive power. “The predictive information extracted from social media,” the authors report, “is incremental to that captured by proposal announcement returns, conventional media coverage, analyst reports, and institutional investors’ responses.”

Acquisition attempts are more likely to be withdrawn when posters criticize a deal for being poorly timed, value damaging, or “self-dealing.” Although their stakes in the game may be small, say the authors, “small investors are informed enough to have identified the pitfalls of an acquisition.” The impact can be profound. “Small shareholders’ criticisms are positively related to an acquirer’s subsequent decision to reduce the offered price for a target,” the authors say. Their findings suggest that informed individuals may use message boards to share insider knowledge on a deal before approval.

This research provides novel insights into the influence of social media on investment decision-making and corporate governance. At a practical level, it illustrates the wisdom of the crowd. Guided by these findings, small investors may log in to message boards for informative opinions on investing. Managers and regulators may also pay attention to valuable information on message boards and take actions that improve corporate decisions.