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Rumors and the Financial Marketplace

  • ESCP Europe - Paris


In the contemporary financial marketplace, the consequences of speculation and decision making based on unfounded assertions and false rumors can be especially potent and undeniably dangerous. With the emergence of the Internet and other new communication technologies that facilitate the spread of misinformation, it has become essential for managers, investors, and other stakeholders to acquire a better understanding of the forces that give rise to rumors and the most effective strategies for dealing with them. This paper describes how the uncertainties and anxieties generated by ambiguous situations, coupled with a strong desire for information, can frequently lead to the generation and spreading of rumors in business environments. Although relatively little research attention has been paid to the particularities of financial rumors, the author identifies some key characteristics that appear to distinguish financial rumors from rumors about other aspects of business operations, such as greater conciseness, a shorter life cycle, and the potential for significant economic consequences. The paper concludes with a set of recommendations for future research and for actions that can be taken to minimize the potentially harmful effects of financial rumors.
Running head: FINANCIAL RUMORS 1
Rumors and the Financial Marketplace
Allan J. Kimmel
ESCP-EAP, European School of Management
Address for editorial correspondence:
Allan J. Kimmel, Ph.D.
79, avenue de la République
ESCP-EAP, European School of Management
Marketing Department
75543 Paris Cedex 11 - France
E-mail: or
(Software used: Microsoft Word 2000)
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In the contemporary financial marketplace, the consequences of speculation and
decision making based on unfounded assertions and false rumors can be especially potent
and undeniably dangerous. With the emergence of the Internet and other new
communication technologies that facilitate the spread of misinformation, it has become
essential for managers, investors, and other stakeholders to acquire a better understanding
of the forces that give rise to rumors and the most effective strategies for dealing with
them. This paper describes how the uncertainties and anxieties generated by ambiguous
situations, coupled with a strong desire for information, can frequently lead to the
generation and spreading of rumors in business environments. Although relatively little
research attention has been paid to the particularities of financial rumors, the author
identifies some key characteristics that appear to distinguish financial rumors from
rumors about other aspects of business operations, such as greater conciseness, a shorter
life cycle, and the potential for significant economic consequences. The paper concludes
with a set of recommendations for future research and for actions that can be taken to
minimize the potentially harmful effects of financial rumors.
Key Words: rumor, hearsay, financial marketplace, financial rumors, rumor control
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Rumors and the Financial Marketplace
As many managers are no doubt well aware, rumors represent an imposing
competitor in the marketplace of information exchange. Virtually every type of
company is plagued from time to time by the spread of unverified stories and
questionable information about its operations, the existence of which is fueled by the
underlying uncertainties and anxieties that characterize the contemporary business
and economic environments. Most of these stories are relatively harmless, drawing
little serious attention and quickly fading away before developing into something
more formidable. However, sometimes the situation festers and takes on a life of its
own, and what may have started out as a seemingly innocuous assertion evolves into a
full-blown whispering campaign that spreads quickly and uncontrollably.
Whereas rumor has always been part and parcel of the business landscape, its
predominance in contemporary financial affairs has grown dramatically along with
recent technological developments. Information available to each of us at any
particular time has expanded exponentially over recent decades. As Richard Saul
Wurman pointedly observed in his 1989 book Information Anxiety, “a weekday
edition of The New York Times contains more information than the average person
was likely to come across in a lifetime in seventeenth-century England.” This is
perhaps nowhere more evident than in the world of business and finance. A brief look
at a Reuter’s financial market screen will provide many times the information one
would ever need.
In this context, with any desired bit of information instantaneously available
with a click of a computer mouse, we might expect that rumors, which traditionally
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have flourished during periods of news blackouts and information famines, would be
a thing of the past. Ironically, the opposite seems to be the case. In contemporary
society, rumors circulate like the air we breathe; more and more, they seem to arise
not from a lack of information, but within a context of information overload. As
demands for greater access to news and instantaneous communication continue to
grow, the reliability of any one piece of information has become that much more
difficult to assess. Indeed, the veracity of much publicly-circulating information has
become progressively more suspect as the capacity for its rapid and widespread flow
has expanded. In many cases we do not know whether the facts have been verified
and often we do not even know where the information originated. Lacking the
identity of the true source, we are left with the thorny task of discriminating reality
from fiction, truth from non-truth, fact from rumor.
There is perhaps no other context as persistently fraught with the
preconditions that predict the emergence and spread of rumors than that of finance.
In recent years, the frequency of financial rumors reported as fact through various
media outlets has shown a steady rise. Perhaps not surprisingly, a quick search of the
Web for marketplace rumors during any given week typically will result in an
abundance of hits. For example, an Internet search conducted during early August
2003, revealed a continuation of the Internet buzz concerning the rumored acquisition
of Sun Microsystems Inc., a report that Anheuser-Busch may be buying the Sara Lee
Bakery Group, and a message board discussion focused on Gillette’s interest in
finding a buyer for Duracell, among an array of stories pertaining to smaller and more
localized firms.
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The Proliferation of Financial Rumors
With the emergence of the Internet and other electronic technologies that
enable the instantaneous spread of information, the management of marketplace
rumors has become more of a challenge than ever before. According to a July 2002
estimate, more than 3,800 new Web sites are created each day, more than 600,000
pages of HTML files are added daily to existing sites, and more than 250,000 new
messages are posted to Usenet news groups (CyberAlert, 2002). Monitoring this
overwhelming amount of information for accuracy has become a daunting, time-
consuming, and expensive task for companies, even with the aid of public search
engines such as Google, Yahoo!, GuruNet, and AltaVista.
The images of neighbors sharing rumors across the picket fence separating
their backyards or passing along a story in a serial chain of telephone calls (as
depicted in Norman Rockwell’s famous painting “The Gossips”) no longer suffice to
adequately characterize the much more complex ways in which information spreads
in contemporary society. Today, a rumor can be disseminated almost instantaneously
by a person with minimal computer skills through the click of a mouse and, within a
span of several hours, a company can experience disastrous financial consequences as
a result.
An example of how an unconfirmed story may be reported as news involved a
false report that was intentionally planted about the financial standing of Emulex, the
California computer networking equipment manufacturer. On August 25, 2000 a
bogus press release reported that Emulex was under federal investigation by the
Securities and Exchange Commission (SEC), that it was revising its quarterly
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earnings to show a loss, and that its chief executive had resigned. The story about the
SEC investigation, in particular, spread like wildfire on various Internet message
boards and, not surprisingly, the false reports had a devastating impact on Emulex’s
stock, causing it to plummet as soon as markets opened (Goldstein & Carrel, 2000).
The impact of the unconfirmed news was swift—Emulex stock plunged more than 50
percent within 15 minutes of the story hitting wider distribution. Specifically, the
company’s shares fell as much as $68, or 61 percent, which represented a loss of
$2.45 billion in market value. By afternoon, trading was halted once news of the hoax
was discovered and the company mounted a public relations campaign and issued
denials in a desperate attempt at damage control. Although the stock recovered much
of its losses by day’s end as exposure of the fraud received widespread media
coverage, Emulex shares nonetheless had fallen 6.5 percent Friday (the day the hoax
appeared) and another 5.9 percent Monday (“Echoes of a Hoax,” 2000).
Ironically, some financial analysts concluded that Emulex was not
substantially harmed by the hoax and actually may have benefited from it as a result
of the national exposure the company received in its aftermath. However, the Emulex
case highlights the growing influence of information technologies and the competitive
nature of public relations and news wire services. Despite controls, in their rush to
beat the competition with apparent breaking news, the financial information services
in this case failed to verify the accuracy of the false news release. The bogus press
release about Emulex’s market difficulties was instigated by a single individual, but
spread instantaneously through the Internet and other electronic media.
The Emulex hoax hardly represents an isolated case; in fact, there have been
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several similar incidents in which fake press releases were posted directly onto on-line
message boards. One year earlier, PairGain Technologies was subject to a fake
Internet news story developed by an unhappy former employee suggesting that the
company was about to be taken over. In this case, PairGain’s stock jumped more than
30 percent, demonstrating how false rumors of this sort can cause stocks to soar. The
fact that this does not happen more frequently has to do with the controls that are used
by established news wire services; nonetheless, these recent stories reflect the high
stakes and potential dangers of financial journalism, in which unconfirmed reports can
induce unpredictable consequences for a company’s stock before the truth catches up.
From the perspective of investors and other stakeholders in the financial
marketplace, perhaps the most disconcerting aspect of these cases is how they
illustrate new and especially potent mechanisms by which misinformation spreads in
this new millennium. Although the financial standing of companies has risen and
fallen on unconfirmed and sometimes bogus reports in the past, it is the diffuse and
near instantaneous spread through newly emergent communication channels that most
clearly distinguish the current financial environment from previous decades. As
recently as 20 years ago, a false report like the one that targeted Emulex might have
been disseminated from a single televised news program, thereby reaching a more
limited and specialized audience. Assuming the validity of the report had not been
vetted from the outset, an Emulex crisis management team would have had a much
larger window of opportunity to respond to the story well before it had reached a
larger audience or had a discernible impact on the firm’s market standing.
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How Rumors Start and Why They Spread
Given the many forms that rumors may take in business and other contexts, it
appears that there is no simple explanation for why rumors emerge, why they tend to
be believed, and why they are transmitted from person to person in spite of sometimes
ludicrous or illogical content. Behavioral scientists and other experts who have
extensively studied this form of interpersonal exchange have pointed to the
involvement of collective and group needs, personal motives, and situational or
contextual forces as being involved in rumor generation and spread (Kimmel, 2004).
Current evidence supports the long-standing notion that rumor represents a
collective (i.e., social) phenomenon with dynamics that can best be explained as
involving a combination of psychological and situational factors. This perspective
was given impetus as a result of the ground-breaking work of social psychologists
Gordon Allport and Leo Postman, whose seminal book The Psychology of Rumor
(1947) stood for many years as a definitive treatise on rumor and rumor diffusion.
Reflecting their focus on rumormongering during World War II, they viewed rumors
as a critical aspect of information management during times of crisis and conflict.
The results of their analysis led them to conclude that the transmission of a rumor is
akin to a process of collective problem solving, and that rumors are set in motion and
spread when there is ambiguity regarding the true facts surrounding a situation and
when the theme of the story has some importance to both speaker and listener—their
so-called basic law of rumor. In other words, personally involving situations that are
marked by ambiguity or a state of doubt are psychologically aversive, and rumors can
be seen as a group’s effort to discern the true facts to obtain cognitive clarity and
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closure. In this sense, rumors are like hypotheses or tentative explanations after the
Allport and Postman might just as well have had in mind rumors that appear in
financial settings as those that emerge during wartime (the contemporary link between
these topical areas notwithstanding) in developing their notions about the etiology of
rumors. The variable of ambiguity, which is central to understanding the psychology
of rumor, can be seen as synonymous with general or free-floating doubt evoked by a
situation in which there is a need for information or cognitive clarity. As any market
investor knows all too well, a widespread sense of uncertainty is part and parcel of
the financial marketplace.
In addition to ambiguous and unverifiable elements, it also is now recognized
that rumors are generated and transmitted when conditions are emotionally involving
or fear-arousing for people (e.g., Walker & Beckerle, 1987). In essence, the anxiety
induced by emotionally unstable situations provides a motivating force for
rumormongering. Thus, it is understandable that rumors represent a logical outgrowth
of a world in flux, to a large extent because fear is a natural outcome of a rapidly
changing world that, for most people, has become progressively more difficult to fully
understand. Applying some of these ideas to the business world, we can understand
why rumors tend to be so prevalent within that context. According to social
psychologist Ralph Rosnow (2001), rumors are a likely outcome when people are
confronted with unexpected events or are challenged by the unforeseen consequences
of anticipated events, such as mergers, takeovers, and changes in management. In his
view, “the more perplexing these events, the more that people need to invent stories to
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put their anxiety to rest. . . and to furnish cues to guide their future behavior” (pp.
212-213). It is likely that the factors that have been implicated in the emergence and
spread of rumors are intimately linked. As the uncertainty surrounding a situation
increases, we might also anticipate a heightening of anxieties, and uncertainty
becomes more difficult for people to tolerate under highly stressful circumstances.
What keeps rumors going once they begin to circulate? One factor that
appears to serve as a critical triggering mechanism for rumor diffusion is the degree of
believability or “credulity” in the rumor. That is, unless rumors are believable or at
least somewhat plausible to their recipients, they are unlikely to be passed along to
others. In fact, when a rumor is received, one of the first steps the recipient takes
before deciding whether to pass the message on to others is to evaluate its credibility
or trustworthiness (e.g., Kimmel & Keefer, 1991; Rosnow, Yost, & Esposito, 1986).
If the rumor has been received from a trusted source, chances are that the recipient
will be less skeptical about the story’s veracity than if the contrary is true, and more
willing to accept any evidence, no matter how weak, to establish a level of
belief. Repetition tends to foster belief, so the more times a rumor is received, the
more likely it will be evaluated as credible.
These conditions pertaining to credibility clearly were in play following the
emergence of the Emulex hoax. The hoax was initiated by an e-mail message that had
been forwarded to Internet Wire, a Web-based news dissemination service, by a
vengeful former employee of that service. The e-mail contained a release from a fake
public relations company describing Emulex’s supposed difficulties, and included
phrases commonly used by the wire service suggesting that the contents of the story
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had been verified earlier. As a result, the Internet Wire staff did not feel it was
necessary to further check its accuracy. In their rush to report a major financial story,
the story was immediately picked up and transmitted by leading financial news wires,
including Bloomberg News and Dow Jones Newswires, as well as the cable news
channel CNBC and numerous Web sites (Goldstein & Carrel, 2000). This
combination of events added to the perceived plausibility of the story.
The Nuts and Bolts of Financial Rumors
It is apparent that financial rumors have much in common with other business-
oriented rumors, yet a closer analysis reveals some important differentiating
characteristics. Although further research is needed, it appears that anxieties linked to
long-term, underlying fears may be less likely to serve as the primary impetus for a
majority of financial rumors; rather, it is the short-termed uncertainties of the moment or
the questionable veracity of information received via informal channels that appear to be
key. In other words, financial rumors are so prevalent in large part because of the strong
interest that stakeholders have in knowing what is going to happen next and what the
consequences of those events may be. This suggests that a key determinant as to the
market impact of financial rumors is their information-bearing function and the apparent
credibility of information at hand.
Some indirect evidence for these ideas was obtained in a preliminary survey
investigation involving 40 French consumer brand managers and communication
specialists that I recently conducted with marketing professor Anne-François Audrain
(Kimmel & Audrain, 2003). The results of the study in part revealed that the variables of
importance (of rumor content) and accuracy (how truthful the rumor turned out to be)
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were the strongest determinants of the frequency of marketplace rumors reported by the
respondents, with anxiety apparently having played an important, albeit secondary, role.
Although the survey investigation was not specifically focused on financial rumors, a
majority of the rumors reported by the respondents pertained to mergers, takeovers, and
the stock market. Another interesting finding that emerged from our study was that
rumors that ultimately proved to be true were characterized by our respondents as having
become more precise as they were transmitted, in contrast to false rumors which grew
progressively more distorted.
Because of their greater conciseness, shorter life cycle, and potential for
significant economic consequences, financial rumors may be less prone to a common
tendency that occurs during the life cycle of other kinds of business-oriented rumors. For
non-financial marketplace rumors, it has been observed that rumor allegations and
company targets tend to be somewhat interchangeable, and allegations originally
involving smaller companies or lesser known products often shift, over time, to larger
and better known targets (Koenig, 1985). This was the case with regard to the rumor that
McDonald’s was putting worms in its hamburgers in order to boost the protein content, a
rumor which first was linked to Wendy’s and only later became associated with
McDonald’s. In fact, larger and better-known firms frequently serve as rumor targets and
rumors tend to shift from smaller to larger companies because greater attention typically
is paid to the content of the story than to the target, and the names of market leaders are
more likely to be retrievable when a rumor is transmitted. When it comes to the financial
trading environment, however, the target of the rumor is likely to be as important a detail
as the content of the allegation and thus careful attention is apt to be paid to both.
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Variations on a Theme: A Typology of Financial Rumors
Financial rumors are likely to emerge daily concerning corporate acquisitions and
takeovers, mergers, and stock movements. These sorts of rumors are such a persistent
phenomenon in the world of finance that in recent years numerous mass media outlets
have been created specifically to report them, including the Wall Street Journal’s “Heard
on the Street” and “Abreast of the Market” columns, Business Week’s “Inside Wall
Street” column, and SmartMoney’s Web site, to name a few. In most cases, the
speculation generated by these unfounded stories never pans out, which does not mean
that they do not cause a reaction on the market (La Monica, 1999a). According to some
analysts, it is less of a gamble for investors simply to follow trading patterns for a
takeover target, for example, than to rely on takeover rumors. This is because savvy
traders who believe that a rumor may have some merit are more likely to buy call options
relative to the targeted company. These options to buy in at a fixed price tend to have a
higher return than the actual stock.
Based on their content, it is possible to distinguish three main types of
financial rumors, depending on whether the rumor concerns companies, people, or the
economic and political environments:
Company-based financial rumors . These are unverified allegations that
directly concern the financial behavior of certain firms, as when company X is
rumored to be readying a takeover bid on company Y. In mid-July 1999 just such a
story emerged when the beleaguered drugstore chain Rite Aid was rumored to be on
the verge of selling out to Wal-Mart. Almost immediately, Rite Aid’s stock gained
nearly 7% on a slow trading day, despite the fact that if people had taken the time to
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assess the rumor’s veracity they would have recognized that its claim did not really
make much sense (La Monica, 1999b). Another example of a company-based
financial rumor appeared in October 2000, when Deutsche Bank AG shares fell 7%
on the heels of a rumor that it had lost $1 billion on a junk-bond deal that had soured
(“Junk-Bond Rumors,” 2000).
People-oriented financial rumors . This second category of financial rumors
focuses on personalities in the business world whose activities could have
implications for the economic stability of their firms or financial markets in general.
These rumors might describe a director’s decision to step down from a post, internal
dissension among the rank-and-file, conflicts between the main shareholder and
CEO, and the like. Such was the case when a story began to circulate that the
database software giant Oracle’s chief financial officer was unhappy with the firm and
about to leave. Such speculation was determined to have caused a drop in Oracle
shares of as much as 15% on the Nasdaq, which responded by voiding some
“erroneous” trades that occurred among confusion surrounding the rumors (“Oracle
Hit,” 2000).
Event-oriented rumors . This type of financial rumor is dependent on events
occurring in the economic and political environments. Any number of events in these
arenas can pose a threat of instability capable of influencing trading activity on the
stock exchange, including speculation about the health of world leaders, elections,
coffee production in Brazil, and so on. For example, reports appearing in a Chinese
financial newspaper in early February 2004 maintained that the central bank was
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poised to revalue the yuan by as much as five per cent over the next few months.
Such speculation raised hopes within financial contexts in the United States of a
smaller trade deficit and a slowing of the loss of manufacturing jobs to China (Porter,
In another case, the rumored return to professional basketball by Michael Jordan
in 1993, after his initial retirement from the game, resulted in investor actions that
significantly increased the stock market value of firms whose products were endorsed by
Jordan. Marketing researcher Lynette Mathur and her colleagues (Mathur, Mathur, &
Rangan, 1997) examined the impact of rumors of Jordan’s impending return to basketball
on the profitability of five of the top firms having products endorsed by the athlete:
General Mills (Wheaties), McDonald’s (Quarter Pounders, Value Meals), Nike (Air
Jordan), Quaker Oats (Gatorade), and Sara Lee (Hanes Underwear). Because these firms
were in mature markets with limited growth potential, the investigators assumed that the
positive outcomes of the rumors for these client firms would best be revealed through a
consideration of the market shares of competing companies with non-Jordan-endorsed
products (e.g., Kellog, Wendy’s, Coca-Cola, Reebok). To test this, the authors utilized
an approach known as event study methodology, which identifies the valuation effects of
marketing decisions.
With this method, it is presumed that investors evaluate and use all relevant new
information that comes to them prior to making an investment decision. While most of
this information will not be considered significant enough to influence their investment
strategies or stock prices, occasionally some new information will be received that seems
important enough to influence the assessment of investment strategies and subsequent
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actions. Information that is viewed positively tends to lead to investor buying that serves
to increase the price of the stock, whereas negatively-evaluated information puts
downward pressure on stock prices. In short, Mather et al.’s findings were consistent
with expectations: investors of Jordan’s firms reacted very favorably to rumors of his
anticipated return to the NBA and, coupled with his increased visibility in the media, this
resulted in an average increase in the market adjusted values of his client firms of more
than $1 billion (2%) in stock market value. A corresponding negative reaction to the
rumors was noted for the stock prices of non-Jordan firms.
Consequences of Financial Rumors
Whatever their specific nature, financial rumors serve an important function for
traders in a context where new information is highly valued. It is presumed that any
change in price or volume of sales for stocks, bonds, or commodities should only come
in response to new and relevant facts about such things as changes in competitors’
pricing structure, fluctuations in interest rates, labor difficulties, takeover activity,
announcements of layoffs, new products, and related factors. For traders to profit from
new information they have to respond before the rest of the market receives the news.
Thus, in the financial marketplace, the pressure to respond quickly and its attendant
anxieties lead to a ready body of consumers for indications of future events. Such a
situation is particularly conducive to the reception of rumors, which frequently bear
messages of managerial decisions and market activity that have not yet been publicly
announced. Given that the Internet and other recent technological advances in
communication have sped up the required decision-making process, unverified
information must be evaluated and reacted to with greater alacrity than ever before.
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As expected, even respected vehicles for market information, such as The Wall
Street Journal frequently carry rumors of profits or losses and managerial decisions not
yet publicly announced. Although efficient market theorists refer to those who trade on
rumor as “noise traders,” there seems to be little doubt that markets are in fact responsive
to such communication. Market researchers have found that the price of a stock reacts
significantly more to “tips” and recommendations when in a bear market than when the
market is stable (Schachter, Hood, Andreassen, & Gerin, 1986). More generally,
financial rumors appear to have their greatest impact on price-induced volatility by
causing unidirectional departures from randomness (DiFonzo & Bordia, 1997). In other
words, prices linked to rumor-based trading tend to get ‘stuck’ in an upward or
downward trend; that is, they become anti-regressive. This tendency for rumors to cause
deviations from randomness is apparent, for example, when a takeover rumor published
in The Wall Street Journal is followed by a significant short-term price run-up.
In today’s global marketplace, traders have grown increasingly desirous of
information pertaining to potential takeover targets. In recent years, analysts and
researchers have scrutinized the influence of takeover rumors on trading activity. For
example, one study carried out at Harvard’s John F. Kennedy School of Government
assessed the impact of 42 takeover rumors appearing in The Wall Street Journal
(WSJ) column “Heard on the Street” from 1983-1985 (Pound & Zeckhauser, 1990).
An analysis of investment opportunities, based on an examination of a one-year buy
and hold trading strategy following the rumor publication date, revealed insignificant
risk-adjusted excess returns. This finding led to the conclusion that the market reacts
efficiently to rumors.
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In a related study, finance professor Terry Zivney and his colleagues (Zivney,
Berin, & Torabzadeh, 1996) examined nearly 900 takeover rumors for the period
1985-1988 by additionally considering those appearing in the WSJ column “Abreast
of the Market.” Their results similarly revealed evidence that the market reacts
efficiently to initial rumors, showing negligible excess returns in the post-rumor
period. Interestingly, however, the investigators found different market reactions
depending upon the newspaper column in which the rumors appeared. Short-term
overreactions in the market were associated with the “Abreast” column as opposed to
rapid price stabilization following rumor publication in the “Heard” column. Based
on their analyses, the authors concluded that shrewd investors would stand to benefit
not by buying on the rumor date and holding for some period of time, but by short-
selling on rumors appearing in the “Abreast” column for a post-rumor period of about
100 days. On this basis, traders could expect a 20% annual excess return with about
70% of the trades being profitable.
In addition to their information function, the content of rumors can serve to
have an impact on financial markets by influencing sentiments of optimism or
pessimism. The influence of consumers’ optimism or pessimism about the future on
their willingness to make purchases is well-known in most business circles.
Additionally, as the Michael Jordan rumors illustrate, it also is clear that the stock
market reacts to headlines of positive or negative events, even when the events are not
directly linked to financial affairs. It seems reasonable to expect rumors, which
typically bear content reflecting hoped-for or feared future events, to influence
consumer and trader sentiments accordingly.
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Rumor Control Strategies
Given that rumors are about as much a part of business life as profits and
losses, it is virtually inevitable that managers will be required to initiate efforts to deal
with them at one time or another. In fact, the management of rumors should represent
a basic component of day-to-day business operations, rather than merely something
that is considered in crisis situations, which is currently the modus operandi for most
Short of ignoring a rumor and hoping it will disappear on its own, most
successful approaches to dealing with marketplace scuttlebutt require the
establishment of an atmosphere of trust and credibility among the firm’s various
publics. In so doing, investors, employees, and the general consuming public will be
less likely to accept (or to act on) rumors that are contrary to the best interests of the
firm. Although this is easier said than done, the following recommendations should
serve managers well for either avoiding the sting of potentially harmful rumors or else
reducing the damaging fallout from rumors that cannot be prevented.
1. Engage in credible public relations (PR) efforts. Public relations
represents one of the most effective means by which companies can garner trust and
minimize the likelihood they will be targeted by false and malicious rumors. When a
firm engages in activities designed to obtain favorable publicity, to build a strong and
positive corporate image, and to strategically communicate with its various
stakeholders, these activities not only serve to accomplish more general PR
objectives, but they also minimize the likelihood that false and potentially damaging
rumors about the company will emerge or be believed.
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2. Be vigilant. Financial rumors should be considered the norm rather than
the exception in the contemporary business environment. Marketing managers and
other company personnel should expect to encounter harmful rumors at any time and
must remain vigilant to that possibility, while at the same time recognizing that
certain rumors can be exploited for the firm’s benefit. In either case, the window of
opportunity will be open only briefly. A variety of changes in the marketplace might
represent early signs of a rumor problem and should be regularly monitored, including
tracking variations in sales volume and market standing or sudden shifts in customer
complaints, Web site visits, and turnover rates in the sales force.
3. Designate rumor monitoring and control officers. Another method for
early rumor detection and monitoring is to appoint certain company personnel as
rumor control officers (RCOs), who would have the role of keeping an ear to the
ground in an effort to detect early signs of potential rumors. RCOs can also be
assigned the task of maintaining sensitivity to any company policy changes,
marketing actions, and other business practices that could be misinterpreted or picked
up on as potential rumor-causing issues.
Given that the Internet and other emerging technologies have begun to alter
the rumor environment, especially in the sense of speeding up the means by which
falsehoods can be transmitted to vast audiences, it should be recognized that they also
can be used by rumor targets to rapidly disseminate rebuttals, corrections,
clarifications, and evidence. At the same time, other Internet sites can be regularly
scanned for malicious, misleading, or otherwise distorted references to the firm.
4. Develop a crisis management plan. Assuming a potentially harmful rumor
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begins to circulate, the firm should be prepared to launch a crisis management plan.
Effective crisis management plans tend to be characterized by four key components
(Yeshin, 1998): speed (the effective handling of a crisis requires an immediate
response to the situation); accuracy (the response to the crisis must be based on
verified information rather than speculation and “gut” feelings); credibility
(spokespersons must have high perceived believability and trustworthiness; the fewer
retractions of previously delivered information, the more likely company officials will
be perceived as credible); and consistency (all official spokespersons should speak
with a common voice). Another element of a crisis management plan that often is
overlooked is the necessity for the firm to anticipate the role of the media. A planned
strategy for enlisting the media as partners in the fight against false rumors at the
outset of a crisis could be helpful in undercutting the possibility that the media will
simply add to the problem once the situation begins to get out of control.
Although it is essential that each firm formulate an approach for dealing with
rumors, there is no foolproof plan for preventing or neutralizing rumors that can
guarantee success for different kinds of companies or varying circumstances.
However, by following some of the recommendations outlined above, a firm stands a
far better chance to be able to defuse a potential rumor crisis or else convert it into a
news story about a malicious, damaging, false rumor that is unfairly targeting the
company’s financial well-being.
Conclusion: Toward Developing A Research Agenda
A great deal of what behavioral scientists have learned to date relative to the
nature of rumors appears relevant to our understanding of rumors that emerge in the
Financial Rumors 22
financial marketplace, yet it is surprising that financial rumors have received
relatively little research attention in their own right, especially considering their
potential impact for firms and a variety of stakeholders. In light of rapid
developments in the way information spreads in the contemporary business and
financial environments, and given certain characteristic differences that distinguish
financial rumors from non-financial ones, it is clear that further scrutiny and
reexamination of the underlying dynamics and transmission of financial rumors is
This paper points to several aspects of financial rumors that could provide a
focus for future research, including the following:
(1) The relative influence of underlying psychological forces that give rise to
financial rumors. Preliminary findings suggest that emotional factors may be less
relevant than cognitive ones in stimulating the financial rumor process.
(2) The processes by which financial rumors change (if at all) during the
transmission process. The shorter life span of financial rumors and the greater
pressure for rumor recipients to act on their content suggest that such rumors are
likely to become more concise and verifiable as they are disseminated.
(3) The influence of rumors on trading activity and price changes. The few
investigations that have been conducted to date suggest that the market reacts
efficiently to rumors, although the conditions under which this is not the case need to
be more fully investigated.
(4) The influence of rumors on consumers and market professionals. Little is
known about how consumers and market professionals respond to financial rumors
Financial Rumors 23
(e.g., in terms of sentiments of optimism or pessimism and the extent to which
experience with prior rumors influence reactions to subsequent ones).
These areas represent a starting point toward the development of a systematic
program of research that ultimately could prove particularly fruitful for managers and
other business-related stakeholders who, more than ever, are faced with a particularly,
amorphous, slippery, and potentially dangerous competitor in the financial
Financial Rumors 24
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... The current literature proposes a range of strategies to manage rumors. Kimmel (2004) proposed that managers should include rumor management as a day to day business operation rather than Facing them when a crisis hits and suggested four strategies to save a company from their harmful effects. The strategies are: first, engage in credible public relations (PR) efforts; second, maintain constant vigilance assuming that rumors are the norm rather than the exception; third, designate rumor monitoring and control officers; and fourth, develop a rumor crisis management plan. ...
... This research shows that the company's lack of a pre-defined strategy for dealing with rumors led to groping when trying to combat rumors. This confirms the recommendations of Kimmel (2004) that companies should view rumor management as a day to day operation and to have well established control and prevention strategies to manage the negative effects of rumors. Marketers of companies especially that are exposed to potentially high safety risk perceptions should include rumor management as an integral part of their marketing activity should designate rumor monitoring and control officers who will identify the potential risks of rumors and deal with rumors whenever they appear as part of the company rumor management plan. ...
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This experimental study was carried out by semi-structured interviews, based on a case of the rumors about Ajinomoto seasoning in Abidjan, Cote d'Ivoire, West Africa. It reports that guiding messages are the most effective strategy to influence consumer behavioral intention. The study found that the no-response strategy of ignoring rumors initially pursued by Ajinomoto exacerbated the decline in company sales performance. This study thus recommends that managers, in combating rumors, should be active and adopt strategies that involve consumers and the public passing on rebuttals of such rumors.
... Rumors are part of our everyday life. As an important part of people's lives, rumors are being used as a special weapon of public opinion and can pose a tremendous impact on social life [7], as well as on financial markets and their spreading has the ability to shape public opinion [8] and lead to social panic and instability afterward [9,10]. Because of the similar propagation mechanism between epidemic spreading and rumor propagation, epidemic models have been widely used in revealing the rumor propagation dynamics of online social networks. ...
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In this paper, we study a new IVESR rumor spreading model with hesitating and forgetting mechanisms in homogeneous network. The rumor free and rumor prevailing equilibriums, and the basic reproduction number ℜ 0 are calculated from the mean-field equations of the model. The local and global stability of rumor free equilibrium are proved by using Lyapunov function and LaSalle invariance principle , and the existence of rumor prevailing equilibrium is shown. In numerical simulations, it is found that the vaccination, prohibiting people to spread the rumor , can lessen the propagation of rumor in the network. We also show that the fuzziness of the rumor has a great impact on the size of spreader and the forgetting factor has a great effect on the rumor prevailing duration. Furthermore, we analyze the sensitivity of different parameters on ℜ 0 and discuss how they affect the spreading and controlling of the rumor. 1. Motivation Rumor is usually defined as the unconfirmed elaboration or annotation of the public interesting things, events or issues that spread through various channels, in itself neither true nor false [1-4]. Rumor is a form of social communication and can shape the public opinion and affects the beliefs of individuals, which can lead to the changes of individual's attitude towards economic, political, and social aspects [5, 6]. Because of the increased presence of online social networks, rumors are no longer spread by word of mouth over a small area but are spread amongst strangers in different regions and different countries. Rumors are part of our everyday life. As an important part of people's lives, rumors are being used as a special weapon of public opinion and can pose a tremendous impact on social life [7], as well as on financial markets and their spreading has the ability to shape public opinion [8] and lead to social panic and instability afterward [9, 10]. Because of the similar propagation mechanism between epidemic spreading and rumor propagation, epidemic models have been widely used in revealing the rumor propagation dynamics of online social networks. The study of rumor-spreading models began in the 1940s. Based on the SIR epidemic model, Daley and Kendall [7, 11] proposed the basic DK model, the beginning of rumor spreading modeling, in the 1960s. In their model, the population is subdivided into three groups: those who are unaware of the rumor (ignorants), those who spread the rumor (spreaders), and those who are aware of the rumor but choose not to spread it (stiflers). After that, Maki [12] modified the DK model and developed the MK model, in which rumors propagate through direct contact between spreaders and others. After-wards, Nekovee et al. [13] and Isham et al. [14] built a new model by combining the MK model with the SIR epidemic
... Another way of approaching the issue of manipulation is, of course, cognitive bias. Mei, Wu and Zhou (2004) showed how the accumulation of cognitive biases among investors can be used to manipulate prices and generate abnormal profits (an idea corroborated by Kimmel (2004), and Goldstein and Guembel (2003)). ...
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The thinking of the philosopher Baruch Spinoza is gradually entering the field of social science. In this paper, we are particularly interested in applying his theory of affects to the analysis of passionate collective behaviours at work in the field of financial markets. The general hypothesis that underpins our work is the idea that, in a context of radical uncertainty about the future, the succession of common affect regimes translates into passionate sequences that determine investor behaviour and produce market dynamics. Using an analysis of the stock market cycles of Taffler et al. (2018, 2019), we show that the Spinozist concept of common affects can help us to understand the mechanisms in the production of collective emotion and to account for the speculative dynamics at the origin of the great financial bubbles.
... However, they also represent a complex psychosocial phenomenon that has been studied in a range of contexts. Rumours that have been investigated within real-world settings have generally been collected, classified, and analysed by researchers in the context of unusual, dangerous or threatening real-life situations, such as wars (e.g., Allport & Postman, 1947;Haque & Sabir, 1975;Knapp, 1944), riots (Bhavnani, Findley, & Kuklinski, 2009), terrorism (Pelletier & Drozda-Senkowska,-2019), natural disasters, including earthquakes (Prasad, 1935), floods (Jacquart & Haas, 2006) and hurricanes (Thomas, 2007), organisational changes (Bordia, Jones, Gallois, Callan, & DiFonzo, 2006), financial speculations and crises (DiFonzo & Bordia, 1997;Kimmel, 2010;Roux-Dufort & Pauchant, 1993), major health issues, such as cancer (DiFonzo, Robinson, Suls, & Rini, 2012) or the HIV and AIDS epidemics (Kimmel & Keefer, 1991;Smith, Lucas, & Latkin, 2010;Stadler, 2003), and in schools (Kieffer, Kiefer, 2013) and workplace bullying situations (Crothers et al., 2009). ...
Rumours are an ubiquitous feature of people's social life and one of the oldest topics in social psychology. Rumours, which tend to spread during crisis situations, allow people to mitigate unpleasant feelings and construct a meaning of the surrounding world. Rumour transmission has been associated with a number of specific individual (e.g., anxiety, personal involvement) and situational (e.g., ambiguity, uncertainty) characteristics and studied with the serial reproduction paradigm (Allport & Postman, 1947) in laboratory settings. The main criticism of rumour research has been its focus on primarily individual‐level analyses in an attempt to explain a social phenomenon. Furthermore, the classic serial reproduction paradigm tends to omit the essential properties of interpersonal interactions and communication processes. Despite the recent and rapidly growing trend of social network methods in social and behavioural sciences, rumour research could also include a finer analysis of individuals' social characteristics and the related complexity of real‐life communication processes. Therefore, the integration of a socially situated approach to rumour transmission might be especially relevant for rumour research and promising for the study of other social phenomena by extension.
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Investment among the computed observations has reportedly been overly impacted by the behavioural factors that have affected the penetration of retail investors in the Indian Equity Market.
Purpose The authors investigate the extent to which online talk can influence contemporaneous and future stock trading, especially when market news is unpresented. Design/methodology/approach The authors propose an improved sentiment formula incorporating online hype, neutral sentiment and poster reputation. In addition, they conduct event study, OLS regression analyses and probit models. Findings First, investors tend to be more talkative in relation to firms that are (1) smaller size, (2) more growth-like, (3) with lower prices and higher short interests and (4) of higher beta. Second, the bullish tone of investors positively affects the abnormal returns of small-capitalization stocks. However, online talk has little impact on large-capitalization stocks, except that more postings boost trading liquidity. Third, online talk predicts the presence of future news regardless of firm size, with stronger predictive power found for small-capitalization stocks. Practical implications It is of interest to practitioners and researchers to study online talk so as to better understand the trading psychology of retail investors and the effects on the stock market. Furthermore, policymakers are interested in tracking activities on stock message boards in order to prevent security fraud and protect investors' interests. Originality/value The results are robust and suggest that online talk has significant impacts on stock trading exploiting an information asymmetry. This study of stock message board posting activities helps researchers to understand whether message contents contain valuable and unique content compared with information available via more traditional media channels.
Conference Paper
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Corporate governance ensures that companies have the necessary internal decision-making and control procedures to take into account — to the extent necessary — the interests of all stakeholders. The ultimate goal, is to create an environment and a sense of assurance that the stakeholders’ confidence in the company is well-founded. Accordingly, during the COVID-19 period, corporate governance principles, especially internal control, should be applied in the public sector, particularly in municipalities and their municipal enterprises, to achieve democracy, transparency, accountability, confidence, satisfaction to citizens and employees, a better working environment, social and economic performance. In this study, we examine the function and effect of corporate governance in municipal enterprises in Serres (Greece) during the COVID-19 pandemic, focusing on its role as part of internal control
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We are happy to announce that the conference proceedings book titled "Corporate Governance: An Interdisciplinary Outlook in the Wake of Pandemic" edited by Stefania Sylos Labini, Alexander Kostyuk, Dmytro Govorun has been released. More than 40 scholars from many countries of the world took an active part in the conference forum discussion and provided more than 300 comments with a deep analysis of the materials presented at the conference. This book contains not only materials of the conference presenters but also all comments generated by the conference participants during the forum discussion as well as a set of infographics with very useful statistics about the conference forum.
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Investment amongst the computed observations has reportedly been overly impacted by the behavioural factors that have affected the penetration of retail investors in the Indian Equity Market. The penetration of investors in Indian Equity Market is 2.5% (Economic Times, Jan 09, 2019) of the population of India. We have conducted an Empirical Analysis which aims to identify the factors influencing the retail investor’s participation in the Indian Equity market. The major factors identified from the literature studied by the researchers are Herd Behaviour, Capital Appreciation, Tax Benefit, Online Trading, Stock Brokers Influence, Stock Prices Movement, and Volatility of the Market, Dividend Returns, Degree of Risk, Individual Financial Needs and Investment Advisories. The study emphases on the validation of the factors identified, which affects the retail investor penetration, attitudes, the buying and the selling behaviour of investors in the Indian Equity Market, with the help of Confirmatory Factor Analysis (CFA)& Path Analysis. The researchers have mostly relied on the survey method to generate primary data using structured questionnaires. Researchers surveyed 273 retail investors and with the help of CFA found that Herd Behaviour, Capital Appreciation, Tax Benefit, Online Trading, Stock Brokers Influence and Investment Advisories are the major factors that have influenced retail investors investment behaviour towards the equity market.
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It is proposed that by making sense of unpredictable price movements, rumors spawn anti-regressive predictions and adversely affect trading decisions despite investor denigration of rumors. Two experimental stock market simulations investigated these ideas. Subjects were presented with news (Study 1) and published and unpublished rumors (Study 2) while participating in a computerized investment game. As compared with controls, all manipulations caused departures from a profitable buy-low-sell-high (tracking) trading strategy despite strong differences in rated credibility between types of information source. Subjects claimed that rumor sources were non-credible and that they were not influenced by rumors in trading decisions; nevertheless they traded on rumors as though they were news. Results integrate rumor theory with the psychology of prediction, extend the corpus of rumor literature to behavior, and highlight the sense-making function of rumor in situations filled with uncertainty.
This fascinating study of commercial rumors--those directed at products, producers, corporations, or retailers--presents case studies illustrating the types and impacts of rumors that can seriously affect a company's image and finances. The volume identifies factors that generate rumors and lead to their communication, with specific discussion of oral communication networks. The special roles of television, call-in radio shows, and media personalities are discussed, as is that very special marketplace--the stock market. This study also provides insights and guidelines for preventing and handling commercial rumors.
Tested the effect of situationally induced anxiety on rumor transmission, with 24 college students as Ss and 2 additional students as confederates. Anxiety was induced through an evaluation apprehension procedure. Ss were asked to orally retake an examination. While waiting their turn to be tested, half of the Ss witnessed a classmate fail the oral test (high anxiety) while the remaining half reviewed easy sample questions (low anxiety). Consistent with R. L. Rosnow's (see record 1980-23236-001) theory, highly anxious Ss repeated rumors more eagerly than less anxious Ss. Although not significant, less anxious Ss reported rumors more accurately than their highly anxious classmates. Anxiety-enhancing rumors were repeated just as often as anxiety-reducing rumors. These results are interpreted in light of Rosnow's revision of the G. W. Allport and L. J. Postman (1947) theory of rumor. (PsycINFO Database Record (c) 2012 APA, all rights reserved)
Examines 3 levels of belief in the truth of a rumor and speculates on how different levels of believability might mediate the factor of uncertainty theorized between anxiety and uncertainty. It is suggested that it is helpful to think of 2 types of uncertainty—that regarding the truth of a rumor and that regarding what to do (response alternatives) if the rumor is true. At one extreme, when believability is low, both types should be commensurately low. At the high extreme of the believability continuum, uncertainty regarding a rumor's truth would again be low whereas that regarding an appropriate response alternative should be relatively high. (PsycINFO Database Record (c) 2012 APA, all rights reserved)
This article examines the effects of takeover rumors on stock prices using a sample of rumors published in the WALL STREET JOURNAL's "Heard on the Street" column. We find that the market reacts efficiently to rumors; simple trading strategies based on buying or selling rumored targets' stocks yield zero excess returns. We document a significant price run-up for rumored targets in the month before publication of the takeover rumor. We find that widespread takeover rumors accurately predict imminent takeover bids less than half the time. Finally, we find that most takeover rumors are preceded by unusual price and volume activity in the stock of the rumored target, which may stimulate speculation that a large block position is being accumulated. Copyright 1990 by the University of Chicago.
Examination of 871 takeover rumors published in two columns of the Wall Street Journal during 1985 through 1988 reveals that the market reacts differently to reports on the same page of the Journal. Rumors in the "Abreast of the Market" column are associated with short-term overreactions, while those in the "Heard on the Street" column exhibit rapid price stabilization following rumor publication. Trading on these overreactions would have resulted in annualized excess returns averaging 20 percent with 70 percent of the trades being profitable. The degree of overreaction appears insensitive to target firm size, percentage of institutional ownership and market (beta) risk.
Rumor Control Strategies Within French Consumer Goods Firms Paper presented at the 110th American Psychological Association conference
  • A J Kimmel
  • A F Audrain
Kimmel, A. J. & A. F. Audrain. " Rumor Control Strategies Within French Consumer Goods Firms. " Paper presented at the 110th American Psychological Association conference, Chicago, August, 2002.
Aggregate Variables in Psychology and Economics: Dependence and the Stock Market
  • S Schachter
  • D C Hood
  • P B Andreassen
  • W Gerin
Schachter, S., D. C. Hood, P. B. Andreassen & W. Gerin. " Aggregate Variables in Psychology and Economics: Dependence and the Stock Market. " In B. Gilad & S. Kaish, eds., Handbook of Be-havioral Economics. Greenwich, Connecticut/ London: JAI Press, Inc., 1986, pp. 237–272.