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Research aims to better predict market trends

Photo by Jennifer Vo.

Telfer professors have begun a new study to investigate the relationship between market sentiment and social media.

Dr. Samir Saadi, an assistant professor and head of the study, hopes his research will be able to accurately predict whether a new firm is ready to go public, and if social media affects investment decisions and long-term stock performance.

Firms that want to become publicly listed will often underprice their shares when they’re first offered for sale to the public during an initial public offering (IPO), Saadi explained.

Consultants will say it’s necessary due to uncertainty about the firms, he said, but examining data shared through Facebook and Twitter could help young entrepreneurs better determine what their business is worth.

The study, carried out with the help of a grant from the Social Sciences and Humanities Research Council (SSHRC), will take two years to complete. Saadi will work with fellow Telfer professors Imed Chkir and Shantanu Dutta, and Masoud Makrehchi, a professor of computer engineering at the University of Ontario Institute of Technology.

The team will data mine social media to gain market information from investors and the public, and analyze it to determine market sentiment on a potential IPO. When the firms eventually make their public debut, the team will then compare their actual share value with what social media helped predict.

“We expect to find market sentiment matters to IPOs, including its pricing, short-term, and long-term performance,” said Saadi.

Saadi said there’s a growing interest from academic, industry, and government agencies in using social media as a “predictive and reactive” analytics tool.

The study is the first to analyze the relationship between social media and IPOs, though there has been broader research on how public opinion can be easily read online. A 2010 study by Sitaram Asur and Bernardo Huberman for HP Labs used tweets to predict box office revenue.

Marketing companies are already cashing in on social media.

“It helps to build relationships between a business and its clients,” said Lara Wellman, a Carleton graduate and social media strategist at Wellman Wilson Consulting.

“If a business can find its audience online, it needs to use the right tools to reach out to them. When the right audience is reached, the business is more likely to have a strong connection with its clients, ensuring success.”

The results of the study will benefit more than just entrepreneurs, said Saadi. Managers could better understand when to take their firms public, based on the attitude social media has towards their company. Investors could use social media to pick the most promising IPO.

Policymakers could watch the general attitude online and react quickly to avoid negative outlooks. Consider the 2008 financial crisis, Saadi explained. “If people had been gauging the attitudes on social media in 2008, the crisis may have been avoided,” he said. “By continuing to analyze social media, we may prevent future economic crises.”