“Pump-and-Dump” through Media Tone? Institutional Trading Strategies during Corporate Litigation

Abstract

Institutional investors often own equity blocks of media companies besides industrial firms. When these industrial firms become defendants of corporate litigation, institutions nudge media companies they simultaneously blockhold to provide more lenient coverage of the defendants. Doing so temporarily props up investor sentiment, mitigates negative price impact, and allows institutions extra time to exit positions in troubled defendants – a pseudo “pump-and-dump” strategy. Dumped shares by institutions are largely absorbed by retail investors. Media boost sentiment by either playing down legal ramifications in question or playing up other positive matters. The strategy is especially prominent among activists, and likely involves institutions’ deliberate and active participation. Ex ante, institutions appear to hold media companies to “save for a rainy day.”

Keywords: “pump-and-dump”, media tone, investor sentiment, corporate litigation, institutional trading strategies