The Masking And Disruptive Effects Of Stock Market Rumors

Rumors,as a form of informal channel information,play a crucial role in the stock market information ecosystem.This study focuses on the opportunistic motives of market participants and delves into the masking effects,disruptive effects,and negative impacts on market price efficiency associated with stock market rumors.Research findings reveal that driven by opportunism,market manipulators use rumors to manipulate the market by concealing unfavorable information and genuine transactions,as well as disrupting trading decisions of uninformed investors and the market’s price formation to maximize their self-interest.Drawing on market microstructure theory and social psychology theories of rumors,the study establishes a theoretical framework that emphasizes the economic interests driving stock market rumors as a form of “cheap talk” strategically transmitted among market participants.Rumor data is conducted by analyzing investor rumor verification queries on interactive platforms of the Shanghai and Shenzhen Stock Exchanges from 2017 to 2020.By analyzing the market effects of stock market rumors in depth,the study clarifies the instrumental significance of stock market rumors in information-based market manipulation.Firstly,this study empirically examines the masking effect of stock market rumors.Using earnings announcements as the research scenario,the study identifies a significant masking effect of stock market rumors in the pre-announcement period,and the masking effect mainly exists in favorable rumors before bearish earnings announcements.Heterogeneity tests reveal that the masking effect of favorable rumors is stronger when the company has poor earnings quality and low corporate governance.Economic consequence analysis demonstrates that favorable rumors preceding earnings announcements lead to an increase in stock prices during that period but result in more significant price corrections following the earnings announcement,especially when earnings fall short of expectations,leading investors to adjust their evaluations of the company’s value more substantially.Further examinations reveal that strategic investment-related rumors exhibit a more pronounced masking effect.Additionally,using the short selling mechanism as an external factor influencing masking motives,the study finds that the masking effect of favorable rumors preceding earnings announcements becomes more significant when a stock becomes a short-selling target.The empirical evidence of the masking effect of rumors contributes to a deeper understanding of the nature,characteristics,and underlying mechanisms of the generation and dissemination of stock market rumors in China.The evident masking signs of stock market rumors imply that rumors are not randomly generated but closely linked to the opportunistic motives of market manipulators.Secondly,the study empirically examines the disruptive effect of stock market rumors.Based on a model of closing price anomalies,potential market manipulation behaviors were identified.The results indicate that stock market rumors,especially favorable rumors,are significantly positively correlated with closing price anomalies,suggesting that market manipulators disrupt stock market transactions by spreading favorable rumors.Mediation analysis reveals that asymmetric information,investor sentiment,and herd trading are the main pathways through which rumors generate disruptive effects.Moderation analysis shows that the disruptive effect of rumors becomes more pronounced when companies have greater market manipulation potential.Further research reveals that the disruptive effect of rumors exacerbates stock price crash risk triggered by closing price anomalies.Additionally,using closing price anomalies as events,this study conducts a short-window analysis to examine of the occurrence probability of rumors,stock price anomalies,information search,and heterogeneous investor trading before and after the event day.Research findings show that: First,the probability of rumor occurrence significantly increases before the event day,the probability of stock price jumps significantly rises on the event day,excess net buying increases significantly before and on the event day,and decreases significantly after the event day.Furthermore,during the entire short-window period,companyrelated internet search volume significantly increases,indicating a substantial rise in investor attention and information demand during market manipulation.Finally,changes in excess net buying show that both retail and institutional investors exhibit certain herd trading behaviors,with retail investors mainly engaging in “selling on the dip” while institutional investors tend to “chase the rise”.The study finds that both major shareholders and short sellers show signs of informed trading during market manipulation,where major shareholders selling off drives the behavior of price manipulation through rumors,while short selling transactions have a certain external governance effect.This study confirms the substantial impact of stock market rumors on closing price anomalies and reveals the role of stock market rumors in market manipulation strategies.Lastly,the study comprehensively analyzes the impact of stock market rumors on price efficiency.The results show that stock market rumors weaken the market’s ability to reflect information,resulting in adverse effects on price efficiency.Specifically:firstly,company-related rumors have heterogeneous effects on stock price synchronicity,with favorable rumors significantly positively correlated with stock price synchronicity,while unfavorable rumors are significantly negatively correlated with stock price synchronicity.Secondly,both favorable and unfavorable rumors are significantly positively correlated with asset mispricing levels,indicating that the information in stock market rumors appears more as noise,leading to a greater deviation of company stock prices from intrinsic value.Finally,both favorable and unfavorable rumors are significantly positively correlated with stock price crash risk,indicating that rumors exacerbate irrational price fluctuations and aggregate market risk.Mechanism tests reveal that favorable rumors of leading companies may affect the likelihood of rumors and stock price synchronicity from other companies in the same industry,resulting in industry spillover effects.Additionally,when retail investors hold a higher proportion of a company’s shares,the impact of rumors on asset mispricing levels and stock price crash risk is more significant.In further tests,a comprehensive indicator of price inefficiency was constructed,revealing that for small-cap companies,companies with low information transparency,and companies with low institutional investor ownership,the positive correlation between rumors and price inefficiency indicators is stronger.Finally,the study examined the market response to rumors and found that overall,rumors have an elevating effect on stock prices;however,prices quickly reverse after a short-term rise,providing evidence of rumors disrupting stock market order.The study strengthens the understanding of rumors as an informational tool for market manipulation and a potential source of market disruption,which contributes to a deeper understanding of the information role of rumors in the stock market,i.e.,stock market rumors essentially serves as a strategically released informal channel of information aimed at maximizing economic interests,which overall damages the market information order and price discovery function,and is not conducive to the orderly operation and high-quality development of the stock market.The study expands the relevant research on stock market rumors and information-based market manipulation,and provides empirical evidence for regulatory agencies to maintain strict governance policies on stock market rumors.