A Little Personalization Goes a Long Way

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May 7 , 2024  |  By Alyssa Riley; Stephen Rowe

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TikTok, an already intimate form of social media, takes its personalization to the next level by implementing e-commerce, in addition to its short-form content creation and consumption. Any user can market TikTok Shop items – a feature no longer exclusive to big-name influencers – and this form of personalized communication has shown significant effects on consumers, me included. For example, a creator that I follow recently posted a video of her trying on and recommending a pair of leggings. As a result, I decided to purchase the leggings – in three colors!

Personalization in social media increases users’ inclination to make purchases, as they feel personally connected to creators and are often more likely to trust their advice than that of the brands themselves. Companies that succeed at personalized communication earn 40 percent more revenue than those lacking in that area because they appeal to potential customers and produce benefits that reach beyond the scope of social media marketing. Even beyond social media and TikTok, personalization aids firm managements in communicating with individual investors to increase attractiveness of long-term performance and behavior, rather than short-term. 

In “The Effect of Personalized Communication on Investor Earnings Fixation,” Stephen P. Rowe (University of Arkansas), Paul W. Black (Auburn University), Kevin E. Jackson (University of Illinois Urbana-Champaign), and Aaron F. Zimbelman (University of South Carolina) explore how personalization increases investors’ systematic processing of financial information.

Investors search for companies that increase research and development (R&D) to meet short-term earnings goals, viewing them as more attractive for investment purposes. In appealing to investors’ short-term focus, managers tend to make myopic decisions, focusing on reducing long-term investment for the sake of meeting their short-term earnings goals.

To increase attractiveness without molding decisions and performance to investors’ liking, companies can leverage technology – specifically social media, customer databases, and online tracking – to gather and utilize information to personally communicate with investors.

To Whom It May Concern

This study, in addition to the theory on technology and personalized communication, examines earnings fixation, which is when investors make judgments based on a company’s current earnings and, therefore, neglect its long-term components. Furthermore, this focus goes hand-in-hand with managerial myopia. According to Rowe, fixating on summary earnings “Often results in investors focusing excessively on short-term performance and penalizing companies that make long-term operational decisions at the cost of short-term performance.”

As personalization significantly increases and has a positive effect on response rates, Rowe does not consider limiting disclosure and disaggregating financial information to reduce the negative consequences on companies, as previous research suggested. Instead, this study considers the ability of managers to evoke in investors a greater appreciation for long-term-oriented behavior, suggesting managers appeal to investors by using current and emerging technologies to personalize communication.

While there are several ways that personalized communication can appeal to the self, the research focuses on a simple personalization method widely used in practice: inserting the recipient’s name in the correspondence, rather than “To Whom It May Concern.” This slight modification suggests that the information is self-relevant to the investor and motivates systematic processing.

Despite the opportunities presented by technological advancements for increased personalized communication, the full extent is unknown. However, as we know, leveraging social media, customer lists, and information obtained through websites provides businesses with many opportunities for continued personalized communication to engage potential investors.

Advancements in technology continue to make personalized communication convenient and cost-effective for businesses to utilize, but there is a lack of prior research on its impact on investors’ use of financial information to make judgments and decisions.

Personalization Effect on Investor Judgments

To address this gap in the impact of personalized communication on investors, the authors focus on the Heuristic-Systematic Model of Information Processing (HSM). A dual-process model, HSM distinguishes between heuristic processing – simplified decisions and rules, as well as more intuitive processing based on learned knowledge structures – and systematic processing, which is more analytical, involving relatively high levels of analysis and integration.

Individuals often revert to heuristic processing when they lack prior and sufficient knowledge. For example, an investor would use cues – such as appeal or benefits – based on a firm’s (im)personal communication when making investment decisions.  Personalized communication, however, increases individuals’ motivation to engage in systematic processing. In this sense, an investor would scrutinize and compare firm-provided information and communication before making an investment choice. This study suggests that systematic processing prompts a reduction in investors’ short-term earnings fixation and a surge in processing the broader financial information with a more long-term orientation.

Based on HSM, the researchers predict that personalized communication will influence investors’ perceptions of investment attractiveness and prompt greater systematic processing of financial information. Consequently, investors are expected to increase their use of earning components and reduce excessive reliance on short-term numbers.

A Pathway to Thoughtful, Long-Term Investing

This study addresses the proven institutional problems concerning investors’ hyperfixation of short-term performance and managers’ susceptibility to making negligible long-term decisions. In doing so, the researchers consider how companies’ leveraging social media, customer databases, and online tracking reverse investors’ earnings fixation and managers’ myopia.

Rowe’s findings indicate that personalized communication, particularly addressing investors by name before introducing financial information, reduces earnings fixation and promotes more systematic processing of financial information. This proven ability to shift investor behavior is crucial for companies aiming to attract investment based on long-term decisions.

While the study provides newfound, valuable insights for researchers and firms seeking to enhance investor attraction to long-term strategies, it also reveals potential drawbacks. Overuse of personalized communication may lead to ineffectiveness or perceived inappropriateness. For example, if a manager was to use overly personal communication tactics with investors before discussing firm performance, it may discourage the investor from continuing the professional relationship.

Additionally, firms must be mindful of strong, preexisting short-term preferences among investors as the influence of personalization is likely subjective; attractiveness urged by personalization can backfire. If an investor has a strong preference for wanting a quick return , personalized communication is likely to have a negative effect on the firm when reporting investments consistent with more managerial myopia. In other words, firms must be well-versed in investor preferences to communicate appropriately and to reach desired investments. Moreover, sufficient prior knowledge of financial information is essential for personalization to enhance systematic processing.

Overall, Rowe and his coauthors address the institutional challenges related to investors’ short-term fixation, providing relevant suggestions for firms and future research in the realm of investor earnings fixation. By fostering a more informed and engaged investor community, it urges the incorporation of financial-specific features in communication, understanding investors’ short-termism and managerial myopia, a shift toward sustainable, long-term decision-making, as well as transparency and accountability.

Alyssa RileyAlyssa Riley is a first-year graduate student earning her master’s degree in News Narrative Journalism. Attending the University of Arkansas as an undergraduate student, she earned her bachelor’s degree in News Editorial Journalism while working in numerous writing, editing and social media roles. In addition to writing for Walton Insights, she has begun her fourth semester as a staff writer for the University’s Hill Magazine and freelances for Celebrate! Arkansas Magazine. After earning her master's, Alyssa hopes to work in the magazine industry, specifically covering arts and culture, entertainment and lifestyle genres.