Customers are important stakeholders of a firm because the ability of the firm to generate cash flows depends in large part on the value it creates for its customers. As the users of a company's products and services, consumers may possess information about product quality and value which can have direct implications for the company's future sales and profitability. The rise of the Internet has greatly facilitated the generation and dissemination of information by ordinary consumers. Consumers not only produce, but also consume product-related information online. According to Nielsen's 2015 Global Trust in Advertising Survey, 66% of consumers trust online consumer reviews, and 69% of those that trust online consumer reviews say they always or sometimes take action on these opinions, suggesting that these reviews may contain useful information about a company's products, and can potentially influence consumers' purchase decisions on a large scale.

Subrahmanyam and Titman (1999)[1] coin the term ‘serendipitous information’ to refer to information that investors encounter in their everyday activities, such as information about product quality and demand. They argue that such information, while noisy, can provide useful signals of the underlying value of a firm when aggregated. Yet there is little evidence on the information content of consumer opinions for firms' future cash flows and stock returns.

Anecdotal evidence suggests that consumer opinions convey value-relevant information to financial markets. As an example, consider consumers' reviews of TurboTax, a software package made by Intuit Inc. Shortly following the release of the software for the 2002 tax season, in November 2002, customers flooded product review websites with complaints about an antipiracy feature on the software. The stock price of Intuit Inc dropped from $27 when the first review on the software was posted on 27 November 2002 to $22 when the first news article was published. Perhaps not coincidentally, on 21 March 2003, the company lowered its earnings expectations for the fiscal year because of weaker sales. It appears that consumers as a group possess useful information about a firm's fundamentals and stock pricing.

In a recent paper, I investigate whether this pattern holds systematically across a broad sample of consumer products firms. Using a large dataset of customer product reviews on, I find that abnormal customer ratings positively predict subsequent stock returns. A spread portfolio that is long on stocks with high abnormal customer ratings and short on stocks with low abnormal customer ratings delivers an abnormal return of about 72--80 basis points per month. The results appear to be concentrated among stocks with high idiosyncratic volatilities and small-cap stocks, which likely face high arbitrage costs and more binding limits to investor attention. Consistent with the idea that consumer ratings contain novel cash flow information, I find that abnormal customer ratings positively predict revenue and earnings surprises, and that the return predictability does not reverse in the long run. Last, abnormal customer ratings are a significant predictor of net purchases by hedge fund managers, suggesting that sophisticated investors exploit the information contained in consumer opinions. Taken together, these findings provide evidence that the aggregated opinions of consumer crowds contain valuable information about cash flows and stock pricing.

These results highlight the role of consumers as information producers in financial markets. Compared to traditional information intermediaries such as equity analysts, consumer crowds can potentially provide more timely information on a company's products and cash flows. Given the collective wisdom of consumers, future research should investigate how firms and other stakeholders, such as creditors and suppliers, can make use of the information conveyed by consumer opinions.

Jiekun Huang is an Assistant Professor in Finance at the University of Illinois at Urbana-Champaign.


[1]       Subrahmanyam, Avanidhar, and Sheridan Titman, 1999, The going-public decision and the development of financial markets, Journal of Finance 54, 1045-1082.