Characteristics and stock prices of firms flamed on the Internet: Evidence from Japan

In this study, we examine the economic impact of flaming on the Internet using Japanese data. The phenomenon of flaming has received a lot of attention from both practitioners and academic researchers over the past 20 years. Many studies associate flaming with computer-mediated communication. A typical definition of this online phenomenon is “the expression of strong and inflammatory opinions to others electronically” (O’Sullivan and Flanagin 2003, p. 161). However, other researchers argue that defining flaming in the context of online behavior assumes technological determinism and confuses the behavior with its causes. Here, we basically follow the definition of Moor et al. (2010, p. 1537), that flaming involves “displaying hostility by insulting, swearing or using otherwise offensive language” towards a person or entity.

Although flaming has been around for decades, its incidence has increased dramatically since 2011, when Social Network Services (SNS)　became more common due to the use of smartphones and tablet computers. Despite its convenience and usefulness for communication and the instant sharing of information with a large number of people, SNS tends to intensify negative online behaviors such as flaming. The result can be serious risk to flamed firms and/or people.

Industries and states have exerted considerable effort to reduce the risk of flaming and construct better Internet governance. However, legal rules may exercise undesirable external power over participants of virtual communities, and outcomes are often unsatisfactory because of international borders with different laws and slow legislative processes. Thus, researchers stress the importance of industry self-regulation, including guidelines on Internet sites.

Although there have been many social-psychological studies on flaming, to the best of our knowledge, no research has examined whether and how flaming affects a firm’s value. To address this gap, we examine the economic impact of flaming. Specifically, we examine data on flamed firms listed on the first and second sections of the Tokyo Stock Exchange between 2006 and September 2013. We find that large firms with negative net income are more likely to be flamed on the Internet. Other findings include: (1) stock prices of target firms react negatively to the flaming; (2) flaming tend to decrease stock prices of target firms significantly that have already reported by newspapers; (3) negative market reactions are intensified by later newspaper reports of the event, and /or with the seriousness of the flaming contents, but are mitigated for older, efficiently managed, and larger firms with lower growth.