Social networks can save the football team?

If your favorite football team is in bad situation in the league,
and you want to change the owner of the team, what will you do?
Recently there was a news article in Wall Street Journal.
It was about the famous English Premier League Foot ball club – Liverpool FC.
At that time, the owner of the team was Tom Hicks who was American(!).
Liverpool’s fans did not like the owner and the team was not in good position in the league.
Therefore, Liverpool’s fans did want to change the owner.
Before the time of social networks,
traditional way for the fans to make the owner of football club get out of that position was threatening with knives and broken bottles.

However, Liverpool fans use very smart method – using social networks to keep him from funding so make him out of money.
It worked like this.
If someone found that the owner went into the bank and met some people in the bank, he or she posted in his or her facebook or tweeter about that, then a lot of people bombarded the bankers who were in charge of lending money with emails.

Now, shareholders (which can be the fans of foot ball team) can do same to affect management decision and even the financing of the company through social networking.
There are some pros and cons about this new possibility of social network to the corporate management and in capital market’s point of view.

Pros

1. Social networks can be the good solution for information imbalance.

The basic assumption of capital market is that market is efficient,
and capital can be invested in optimal way when the market is efficient.
However, information imbalance in the market can cause market inefficiency.
Social networks can be the solution for this through providing more information.
Shareholders can get more information through the social networks as fans of Liverpool FC could know that the owner wanted to get new fund from the bank.
Through the rule of six degree, people can get information about the company even from the insiders.
Even this is the reason why some companies try to prohibit their employees to use social network services.
However, there is more chance to get information and this can be the one good solution for information imbalance.

2. Small shareholders and stakeholders can make their voices through social networks.

Social network is very effective communication and collaboration tool with other people who share the ideas.
Agency problem is very serious problem nowadays.
Small shareholders could not make their voice to the companies’ management’s decisions in the past.
However, social networks can make it possible for people to deliver their opinions and act to change the management team as we can see the case of Liverpool FC.
The increasing power of people through social networks also can prevent the company from wrong doing e.g environmental pollution.

Cons

1. Rumor can affect negatively to the capital market

One big problem of the social network would be the danger of unproven information.
For the company’s point of view, negative rumor affect hugely to the company.
There is a lot of wrong information and social networks increase the speed of spreading this information.
It can cause huge disaster to the company and as a market.
The information decreases the efficiency of the market.

2. The danger of “Popularism”

The increased power of the public can make the decision based on public’s preferences.
In recent bailout plan of Ireland gives some insights for this fact.
Ireland’s people do not want to get bailout but if not, it will cause bigger problem to the economy.
Sometimes, it is necessary to act against the will of the public.
However, the social networks can cause “Popularism” in the economic policy.

Let’s go back to our first question.
Can social network save the football team?
Actually, the owner was changed but Liverpool FC is still ranked 10th in Premier League.
We cannot decide the social network work better off or worse off for the team yet.
However, it is true that social network gives more possibilities to correct problems of the companies and economy as a whole.
The dynamic flow of information among people through social networks will be the power to solve the problems of side effect of bad information and popularism.

References

http://online.wsj.com/article/SB10001424052748704814204575508070757773784.html?KEYWORDS=liverpool+tom+hicks

http://www.mccombs.utexas.edu/news/research_calendar/FIN_Kuhnen_1_30_06.pdf