Should Managerial Responses to Online Word-of-Mouth be Prescriptive? Impacts on Firm Performance

Firms are shifting their social media emphasis from passive listening to active intervention. Despite the proven importance of online word-of-mouth (WOM) on customer satisfaction and engagement as well as firm performance in prior literature, when and how should firms utilize management responses to leverage the wisdom of online crowds remains unknown. This paper investigates various conditions in relation to polarized valence and volume of online WOM, under which management responses manifest the performance-improving effects. Our empirical strategy hinges on an instrumental variable approach, in which we employ user characteristics to instrument the endogenous online WOM and management responses. We find that it is at the firms' best interest to provide management responses when (1) the volume of online WOM is low but its valence is high and (2) the volume of online WOM is high but its valence is low. Our findings are managerially relevant to firms' social media strategies and provide actionable implications on when and how management responses to online WOM improve firm performance