Social media has become a controversial tool. Observers need look no further than Donald Trump’s use of Twitter to see that. But what about other leaders—chief executives perhaps? Research indicates a social media presence for CEOs means they are more likely to trade in the shares of the companies they lead. Which may raise ethical concerns.
A group of academics across Canada and the US looked at the behaviour of 637 CEOs at US public companies that also use social media and found that they are more likely to make “open market purchases” of their own companies’ stock than CEOs not posting on sites such as Twitter, Facebook and LinkedIn. The researchers take such purchases to be a “proxy” for insider dealing and the use of private information not available to the general stock-buying public.
That’s not all: CEOs posting online also buy shares more often and earn bigger profits from their acquisitions.
The study concludes: “We find CEOs with a social media presence are more likely to purchase their companies’ own stock, to conduct such buys with a higher intensity, and to derive greater trading profits from these trades.” The researchers add: “Furthermore, these purchases are primarily opportunistic in nature and do not adhere to any routine patterns.”
Ethical concerns
The researchers worry that CEOs with a social media presence are more likely to put ethical concerns aside when considering a trade in their company stock. Previous research, they point out, found that using social media lowers self-control and is related to behaviour such as binge eating and “greater credit card debt”.
Those findings triggered the researchers to question whether use of social media might be related to CEOs trading in their own company stock.
They acknowledge there might be other explanations for CEOs using social media use and engaging in more trades. One possible reason could be that the CEOs who post and trade are simply more confident individuals, and thus more likely to indulge in both activities.
Another possible explanation is that posting and trading are related to a CEO’s ability to “collect and analyse information”.
But the researchers are sceptical about these alternative readings. CEOs with a social media presence are not “passive” traders they “choose” to make more trades and in periods when “their trades are more likely to be information driven,” they argue.
“At the very least, these CEOs fail to put ethical consideration before personal trading gains.”
Likewise the academics dismiss the idea of “confidence” as a background issue. That might explain a higher number of trades, but it cannot shed light on why CEOs that tweet score “greater abnormal returns”.
“Again our findings indicate that CEOs with social media presence are more likely to engage in opportunistic (and profitable) insider trading, which goes against ethical standards for corporate insiders.”
Reputational risk
These conclusions are controversial. Until now the main worry over free wheeling use of social media has been the risk of reputational damage should an off-hand post ignite a public backlash. Elon Musk’s tweets have earned much criticism and the attention of shareholders and regulators alike.
But the results show there may be something else going on. The writers say their research reveals “preliminary evidence” of a connection between the influence of social media and “business conduct and ethics”.
“Companies should be aware of the potential negative effects of social media as their top executives embrace this new platform,” they observe.