Stock Market Rumors and Credibility
Review of Financial Studies, Forthcoming
64 Pages Posted: 16 Feb 2019 Last revised: 16 May 2019
Date Written: November 21, 2018
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 dataset of takeover rumors covered by US newspapers, I find suggestive evidence in support of this prediction.
Keywords: Rumors, Cheap Talk, Investment Horizons, Information Efficiency
JEL Classification: G11, G14
Suggested Citation: Suggested Citation