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This research examines the effect of disclosing social media activities on firm valuation. Firms benefit from social media technologies through promoting their products or services, collecting customer feedback to improve product design, and providing better customer support. We develop and test the hypothesis that a firm’s disclosures of social media activities in its annual reports should have a positive impact on its market value. We conduct 26 keywords search in the annual reports that public firms filed with the U.S. Securities Exchange Commission (the SEC) to identify disclosing firms from 2008 to 2010. Our sample contains 594 disclosing firm year observations and 9,232 non-disclosing firm year observations from the merged database of Compustat and Center for Research in Security Prices (CRSP) in this sample period. The variables used as a proxy for firm valuation include share price at the end of March in the following year and market-to-book ratio, which is the year-end market value of equity versus the prior year-end book value of equity. We perform a panel regression analysis of firm valuation on a dummy of a firm disclosing social media initiatives, controlling for earnings per share, firm size, and book value of equity. We find that disclosing social media activities have a positive impact on firm value. Our findings indicate that a firm should engage in social media activities to gain competitive advantage and maximize shareholders’ wealth.

Soical media, firm valuation