Rumors

Abstract

A Kyle (1985) model with private information di¡usion is used to examine the motivation to spread stock tips. An informed investor with limited investment capacity spreads imprecise rumors to an audience of followers. Followers trade on the advice and move the price. Due to the imprecision of the rumor, the price overshoots with positive probability.This gives the rumormonger the opportunity to trade twice: First when she receives information, then when she knows the price to be overshooting. In equilibrium, rumors are informative and both rumormongers and followers increase their pro¢ts at the expense of uninformed liquidity traders.IT IS DIFFICULT TO DISPUTE that rumors have an important impact on stock prices. Phrases like ''Stock X soared amidst rumors of y'' can be read or heard almost daily in the popular media.Yet an economic theory about the phenomenon is conspicuously absent. This article argues that the sources of rumors are small informed investors who manipulate prices to increase their information-based pro¢ts. Rumormongers can be skillful amateur analysts, investors with access to serendipitous information such as suppliers or clients, or individuals with access to inside information.They have in common that their trading capacity is too small to fully exploit their information by trading in the stock market. A rational expectations model shows that informed investors can increase their pro¢ts by giving informative but imprecise trading advice to a chain of followers to manipulate market prices.In recent years, the Internet has proven a productive incubator of rumors. Investors exchange information in chatrooms, newsgroups, and message boards. Rumors can also spread through word of mouth or newsletters. This article considers those privately communicated messages that contain information and hence induce rational pro¢t-maximizing investors to trade. The presented analysis

Corporate Serial Acquisitions: An Empirical Test of the Learning Hypothesis

“…The Panel A results conflict with the previously-reported univariate CAR results (see Table 4 (Travlos, 1987) and higher anticipations (runup) reduce the observed CAR around the announcement date ( Van Bommel, 2003). …”

Manipulation and Information Acquisition

“…Assumptions (ii) and (iii) imply that the manipulator trades without being noticed (a similar assumption is made by van Bommel 2003). Consequently, P 0 provides no information about s M , which simplifies the computation of posterior beliefs.…”

“…that is, 13 See Benabou and Laroque (1992) and van Bommel (2003) for models with both types of speculation.…”

“…Benabou and Laroque 1992, van Bommel 2003and Fishman 2007. However, to the best of my knowledge, none considers the availability of other information sources that investors can use to assess the credibility of the information announced.…”

“…This paper adds to the literature on information-based manipulation. The closest references are Benabou and Laroque (1992), van Bommel (2003) and Fishman (2007). Benabou and Laroque (1992) and Fishman (2007) analyze the strategic disclosure of information by insiders in models of repeated interaction where investors learn about the type of the insiders.…”