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Stock Market Rumors and Credibility

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  • Daniel Schmidt
  • Itay Goldstein

Abstract

Stock prices occasionally move in response to unverified rumors. I propose a cheap talk model in which a rumormonger’s incentives to tell the truth depend on the interaction between her investment horizon and the information acquisition decisions of message-receiving investors. The model’s key prediction is that short investment horizons can facilitate credible information sharing between investors, thereby accelerating the information capitalization into market prices. Analyzing a data set of takeover rumors covered by U.S. newspapers, I find suggestive evidence in support of this prediction.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Daniel Schmidt & Itay Goldstein, 2020. "Stock Market Rumors and Credibility," The Review of Financial Studies, Society for Financial Studies, vol. 33(8), pages 3804-3853.
    • Handle: RePEc:oup:rfinst:v:33:y:2020:i:8:p:3804-3853.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhz120
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    Cited by:

    1. Zin Yau Heng & Henry Leung, 2023. "The role of option‐based information on StockTwits, options trading volume, and stock returns," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(8), pages 1091-1125, August.
    2. Jinzhi Lu & Pingyang Gao, 2024. "Short, Disclose, and Distort," Papers 2404.07630, arXiv.org.
    3. Neukirchen, Daniel & Engelhardt, Nils & Krause, Miguel & Posch, Peter N., 2023. "The value of (private) investor relations during the COVID-19 crisis," Journal of Banking & Finance, Elsevier, vol. 147(C).
    4. Hong, Ziyang & Liu, Qingfu & Tse, Yiuman & Wang, Zilu, 2023. "Black mouth, investor attention, and stock return," International Review of Financial Analysis, Elsevier, vol. 90(C).
    5. Andres, Christian & Bazhutov, Dmitry & Cumming, Douglas J. & Limbach, Peter, 2023. "Does speculative news hurt productivity? Evidence from takeover rumors," CFS Working Paper Series 701, Center for Financial Studies (CFS).

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