Linguistic Formality and Audience Engagement – Investors’ Reactions to Unique Characteristics of Social Media Disclosures

Disclosures on social media have unique characteristics compared to those in more traditional channels. In this paper we examine whether linguistic formality in disclosures, as well as engagement of social media users surrounding the disclosures (e.g. “favorites” and “retweets”), affect investors’ judgments about a firm and its management. Holding information constant, our experiment manipulates the formality of language used in social media disclosures and audience engagement with each disclosure. Results suggest that firms benefit from using informal language, but only when it is accompanied by high engagement among users of social media. Specifically, the combination of informal language and high engagement increases willingness to invest in a firm, and this occurs indirectly through increased assessments of management’s competence. Our findings are consistent with the idea that informal language can signal communicative competence when used in an appropriate environment. In a follow-up experiment we investigate how news valence and linguistic formality affect the level of audience engagement in the first place. Overall, our results demonstrate how firms might utilize social media to better connect with investors and shape their judgments.