‘Pump and Dump’ through Media Tone: The Role of Cross-Blockholders in Corporate Litigation

Abstract

We show that during corporate litigation, media companies that share common institutional blockholders with the defendant firms (i.e., cross-held media) cover the litigation events more favorably than non-cross-held media. The favorable news coverage boosts investor sentiment, mitigates negative stock price impact, and allows cross-blockholders more time to exit their positions in troubled defendants at higher prices – a de facto “pump and dump” strategy. This strategy is especially prominent among activist blockholders. It is also stronger when there is more room to manipulate investor sentiment, and when an extended period of price support is necessary for institutions to unload large positions.

Keywords: pump and dump, media tone, market sentiment, corporate litigation, institutional blockholders