How to beat the stock market: read online reviews

Posted by Kate Taylor

When you give a product a bad review on Amazon, you're not just influencing other shoppers - you're driving the manufacturer's stock price down too.

According to USC Marshall researchers, bad reviews can hit a company's stock price by as much as eight percent. And, they say, there's a four-day lead time, giving a useful tool to the canny investor.

Professor Gerard J Tellis and former doctoral candidate Seshadri Tirunillai - now at the University of Houston - say they beat the S&P 500 index by eight percent in a hypothetical investment strategy, simply by buying stocks on positive chatter and short-selling them on negative reviews.

The study looked at 15 brands across six markets from June 2005 to January 2010: personal computing, cellular phones, personal digital assistants or smartphones, footwear, toys and data storage.

A total of 347,628 consumer reviews and product ratings from the most popular websites for such reviews - Amazon.com, Epinions.com, and Yahoo Shopping - were studied.

Negative reviews affected stock prices and trading volume the most, eroding about $1.4 million from the average market capitalization in the short term and $3.3 million over the 15 days following the chatter.

Positive reviews also had an effect, although a much smaller one - and so did advertising. A one percent increase in advertising expenditure increased positive chatter by 0.1 percent, and decreased negative chatter by 0.19 percent.

Positive talk was perhaps less-heeded because readers considered it suspect, says the team.