Can Online Feedback Help China Curb Corporate Misconduct?

Social media has made it easier for investors to access market information and share their opinions with a broad audience.

It is also becoming increasingly popular for firms to adopt social media platforms like X (formerly Twitter) for their corporate practices. However, few social media platforms allow investors, especially retail investors, to directly interact with firms.

Retail investors play a significant role in China’s capital markets. According to the SZSE Fact Book, the number of retail trading accounts is approximately 200 times greater than that of institutional investors.

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Data from the Shanghai Stock Exchange also shows that retail investors accounted for 89.1% of total trading volume.

To empower small investors in China, the Shenzhen and Shanghai Stock Exchanges introduced two online interactive platforms, Easy Interaction on January 1, 2010, and E-Interaction on July 5, 2013.

The interactive platforms are distinct from other social media platforms as they facilitate engagement between investors and companies by allowing firms to respond directly to investors’ questions and concerns.

Responses offer insights

Their responses often offer insights and details about operational, financial, and investment matters, along with information on business operations, marketing, and growth strategies.

This helps investors lower efforts and costs to digest and make use of the disclosed information.

In contrast, other social media platforms such as X (formerly Twitter) can spread noisy or fake information, potentially misleading investors.

For instance, in 2015, the US Securities and Exchange Commission charged a Scottish trader for using Twitter to spread rumours about two companies, which caused one company’s stock price to plunge and the other to halt trading (SEC Press Release, 2015).

In my recent publication with my co-authors, we find that online interactive platforms can reduce the incidence of corporate misconduct.

One-standard-deviation increases the questions asked by investors and replies made by firms can lead to the reduction of corporate misconduct incidence by 3.72% and 5.34%.

This indicates that China’s interactive investor platforms as quasi-social media play an important role in monitoring corporate misconduct.

Our study contributes to growing evidence of the rising influence of retail investors in capital markets. Compared to institutional investors, retail investors generally have limited access to information and thus have little influence on financial markets (Malmendier & Shanthikumar, 2007; Ang et al., 2021).

However, the emergence of social media platforms has enabled retail investors to engage more actively in financial markets.

A notable example is the dramatic surge in GameStop’s stock price in January 2021, fuelled by a short squeeze initiated by retail investors.

As retail investors increasingly play a constructive role in addressing corporate misconduct, our findings offer valuable insights for market participants, regulators, and policymakers.

Policymakers could monitor interactions between investors and firms on social media to detect potential misconduct.

Retail investors can leverage these platforms to gather information that supports informed investment decisions.

And corporations may receive constructive feedback on their governance practices, helping to mitigate the risk of misconduct.

Interactive investor platforms act as watchdogs against corporate misconduct and could serve as a model for adoption by other regulatory jurisdictions.