The Market Reaction To Rumor Clarifications On China’s Stock Market

In the past twenty years, China’s securities market has developed rapidly, meanwhile, the media environment has also undergone enormous changes. The development of technology and media has made dissemination of information more and more convenient. In addition, China’s stock market is full of information uncertainty, which also makes it a good place for rumors to spread. In China, listed companies are obligated to disclose "clarification announcements" when there are rumors spreading in the public media. However, many of the clarification announcements are of poor quality and are insufficient. Most of the previous research focuses on the effect of rumors themselves. Instead, this paper concentrates on the effect of rumor clarifications rather than on rumors themselves, which is the major contribution and innovation of this paper.After reviewing the previous research, this paper proposes three hypotheses.214effect clarification announcements are collected from Shanghai and Shenzhen listed companies during January2012to December2014. Firstly, this paper carefully investigates the rumors and clarification announcements on China’s stock market. Secondly, this paper categorizes all the samples into four sub-samples according to the nature of rumors and the attitude of clarification announcements. Then this paper adopts event studies to analyze the effect of rumors and rumor clarifications on each sub-sample respectively. Finally, this paper studies the relationship between the effectiveness of clarification and the quality of clarification announcement.The results show that, the positive rumors have positive abnormal return, while the negative rumors have negative abnormal return before the listed companies disclose clarification announcement, and the market reaction to the good rumors is more significant than the bad rumors. When listed companies disclose clarification announcement which affirms the rumor, the stock price will change in the same direction with the rumor. On the contrary, when listed companies disclose clarification announcement which denials the rumor, the stock price still changes in the same direction with the rumor, which implies the inefficiency of clarification announcement. It indicates that market underreact to the clarification announcement. And investors perform irrational behavior when dealing with the rumors and clarification announcements. In addition, the result of multiple regression analysis shows that the coefficients of the time span between rumors and clarification announcements and clarification wording are significant, which indicates that the enhancement of timeliness and certainty of the clarification announcements contributes to the improvement of the effectiveness of clarification announcements. In the end, this paper proposes several suggestions to investors, listed companies and regulatory authority.