"It's guided in the concept of wisdom of crowds -- a group of diverse problem solvers can predict outcomes better than experts," said Eli Bartov, a professor of accounting at NYU's Stern School of Business and one of the report's authors.
The researchers analyzed 998,495 tweets on the social media site during the span of four years in the nine days leading up to a company's earnings report. The study tracked 3,662 Russell 3000 firms.
"The aggregate opinion contained in individuals' tweets about a company's prospects can predict its earnings and the stock price's reaction to them," according to the report. The findings were more clear in lesser-known companies that don't garner much press or analyst coverage.
"We document a positive association between our measures of aggregate tweet opinion written prior to the earnings announcement and the abnormal stock price reactions to the earnings announcements," the report noted.
Investors have long relied on analyst opinion, quarterly reports from companies and technical analysis to make stock trades. Bartov suggests adding Twitter to one's research regimen. "In order to invest wisely in the stock market as opposed to gambling, you need to base your investment decisions on information," Bartov said. "Even tweets by individuals who may not have any special knowledge or advantage may be useful."
On the flip side Bartov acknowledged the tendency for "Twitter noise," or the notion of inaccurate and unreliable information on Twitter. "Skeptics argue people may use Twitter to mislead investors," he said. "It's entirely possible that people take a position in a stock, then Tweet false information in order to pump up the stock price, then sell the stock and take profits at the expense of many investors."
That said, Bartov doesn't think regulatory bodies need to weigh in. "Our study shows [the aforementioned misleading scenario] is not a real concern and investors can use each other to share information for their mutual benefits," he added.
Keep in mind, investors may not have the time or skill to replicate the methodology Bartov used in his analysis. But that doesn't mean retail investors can't incorporate Twitter into their research.
"Prior to earnings announcements, investors can look on Twitter for their company of interest and try to get a sense of what the majority of tweets are saying and act accordingly," he advised. "The tweets not only predict the earnings outcome but the stock price changes around the earnings announcement.